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Currency volatility dims as Fed stands behind continued stimulus

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Currency volatility dims as Fed stands behind continued stimulus

The foreign exchange market took a volatile turn after June’s hawkish FOMC policy meetings, when Fed policymakers pointed to deepening US recovery as a sign that monetary policy would soon change course. Under the assumption that the United States Federal Reserve would soon begin tapering its monthly bond buying, investors loaded up on US dollars, which sent the greenback soaring. Between June 18 and July 9, the US dollar index advanced more than 5 percent, as investors were convinced imminent stimulus tapering would result in higher interest rates.

Volatility among the Group of Seven currencies has declined steadily this month, as investors cut their bullish bets on the US dollar. JPMorgan Chase & Co.’s (NYSE:JPM) G7 Volatility Index, the leading volatility gauge among Group of Seven currencies, dropped to a 10-week low Tuesday, as investors increase their bets that the Federal Reserve won’t rush to increase interest rates in the near-term.

Speculation over imminent interest rate hikes have dimmed in recent weeks. Following the release of dovish FOMC meeting minutes and several testimonies from US Fed Chairman Ben Bernanke, the timetable for stimulus reduction is less certain than it has ever been. Bernanke has repeatedly stated Fed stimulus is not on a preset course, and the pace of quantitative easing would depend on the status of economic recovery.

The selloff of US dollars continued this week, following the release of weak June housing sales. The dollar index declined a quarter percent to close the New York session at 82.03. The dollar strengthened 0.1 percent versus the yen, but later fell more than 0.4 percent to 99.57. The Canadian dollar soared 0.4 percent Tuesday, sending the USDCAD to 1.0290, its lowest since June 20. The British pound also continued its winning streak Tuesday, closing the New York session at 1.5375 (+0.1 percent).

The other factor countering G7 volatility has been the rise of China’s yuan. The Chinese currency is facing less bearishness after the People’s Bank of China said the yuan’s exchange rate is approaching equilibrium.

JPMorgan’s G7 Volatility index declined to 9.19 percent in the New York trade, its ninth consecutive day of decline.

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