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Dollar Drops to One-Month Low on Fed Rates Message; Krone Slumps

June 19 (Bloomberg) -- The Bloomberg Dollar Spot Index fell to its weakest level in almost a month after the Federal Reserve said it will keep interest rates near zero for a “considerable time,” boosting demand for overseas assets.

The dollar slid against Asian currencies as a rally in Treasuries and a slump in foreign-exchange volatility to a record boosted demand for higher-yielding investments. The greenback fell for a second day against the euro, the first back-to-back declines this month, as the Federal Open Market Committee cut the outlook for long-term rates after yesterday’s policy meeting. Norway’s krone tumbled the most in nine months versus the euro as the central bank said it may ease policy.

“The FOMC was not the game-changing event people hoped it would be and that has resulted in the dollar weakening generally with U.S. yields,” said Adam Cole, head of Group-of-10 currency strategy at Royal Bank of Canada in London. “It’s also resulted in volatility crushing to new lows, which we think in itself is a dollar-negative event.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 counterparts, dropped 0.2 percent to 1,009.13 at 8:31 a.m. New York time after touching 1,008.19, the lowest since May 21.

The dollar weakened 0.2 percent to $1.3620 per euro, adding to a 0.4 percent slide yesterday. It’s set for its first two-day drop since the period through May 30. The U.S. currency fell 0.1 percent to 101.86 yen. The euro strengthened 0.1 percent to 138.73 yen.

Fed Target

While Fed officials predicted their target rate would be higher at the end of 2015 and a year later than previously forecast, they lowered their long-run estimated rate to 3.75 percent from 4 percent, reflecting slower long-term growth for the economy.

Officials have kept the Federal Funds Target Rate between zero and 0.25 percent since 2008 and there’s an 89 percent chance Fed Chair Janet Yellen will keep it there by the end of this year, according to futures data compiled by Bloomberg.

Benchmark 10-year Treasury yields dropped seven basis points, or 0.07 percentage point, yesterday. They were little changed at 2.58 percent today.

“Yellen basically said recent data haven’t been enough to confirm a pickup in the economic recovery,” said Ken Takahashi, assistant vice president for global markets at Sumitomo Mitsui Trust Bank Ltd. in New York. “Investors expect accommodative policy to continue for some time, meaning a weak dollar and strength in high-yielding currencies.”

Carry Rally

India’s rupee strengthened the most in a month, leading a rally in Asian currencies after they had been buffeted this week by higher oil prices caused by violence in Iraq.

The rupee gained 0.5 percent to 60.0863 per dollar, the biggest advance since May 22, Indonesia’s rupiah climbed 0.5 percent to 11,934 per dollar and the Philippine peso strengthened 0.6 percent to 43.83 per dollar.

Boosting demand for carry trades, where investors seek to profit from differences in interest rates, JPMorgan Chase & Co.’s Global FX Volatility Index fell to 5.60 percent, the least since Bloomberg started collecting the data in 1992.

That’s down from 27 percent in October 2008, after Lehman Brothers Holdings Inc.’s collapse froze credit markets amid the worst financial crisis since the Great Depression.

Norway’s krone slumped 1.9 percent to 8.3221 per euro, the biggest drop since July 2013, after central bank Governor Oeystein Olsen said a further weakening of the outlook for the economy “may warrant a reduction in the key policy rate.” The Oslo-based Norges Bank kept the deposit rate at 1.5 percent for a 14th consecutive meeting today as predicted by all 22 economists in a Bloomberg survey.

Kiwi Grounded

The dollar weakened 1.6 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The New Zealand dollar was the best performer with a 5.6 percent advance.

The kiwi fell against all but three of its 16 major counterparts today after Statistics New Zealand said gross domestic product expanded 1 percent in the first quarter from the previous three months, less than the 1.1 percent predicted by the Reserve Bank and economists surveyed by Bloomberg News.

New Zealand’s currency dropped 0.2 percent to 87.21 U.S. cents.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Nicholas Reynolds

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