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Dollar Trades at Almost One-Month Low on Fed; Krone Extends Drop

June 20 (Bloomberg) -- A gauge of the dollar traded at almost one-month low after currency volatility slid to a record amid prospects a sluggish U.S. economy will prompt the Federal Reserve to keep interest rates near zero.

The greenback headed for its biggest weekly decline in two months against the euro before U.S. reports next week that economists said will show manufacturing activity cooled and the economy contracted. The Fed said this week it will keep interest rates at almost zero for a “considerable time.” The yen was little changed after Bank of Japan Governor Haruhiko Kuroda reiterated stimulus would continue. Norway’s krone was set for its longest losing run against the euro in more than a year.

“The dollar is not in a good place to mount a major recovery,” said Kathleen Brooks, European research director at Forex.com in London. “There could be a bit of consolidation around these lows. The dollar is now suffering.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 of its major counterparts, added 0.1 percent to 1,010.80 at 7:44 a.m. New York time from 1,010.32 yesterday, when it dropped to 1,008.19, the lowest since May 21.

The dollar gained 0.2 percent to $1.3588 per euro, poised for a 0.3 percent weekly decline, the biggest since the period ended April 11. The U.S. currency rose 0.1 percent to 102.05 yen. The euro was little changed at 138.69 yen.

Volatility Plummets

A Deutsche Bank AG gauge of currency volatility was at 5.51 percent after reaching 5.28, the lowest on record in data going back to 2001. A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.

“Volatility across asset classes has continued to plummet,” Greg Moore, senior currency strategist at Royal Bank of Canada in Toronto, wrote in a note to clients today. “The combination of low U.S. yields, low FX volatility and USD’s diminished status as a safe-haven leave it vulnerable to becoming the ‘default’ funding currency in EM-G10 carry trades and we continue to highlight this as a major risk to the bullish USD consensus view.”

U.S. Manufacturing

The Markit Economics preliminary index of U.S. manufacturing slid in June to 56 from 56.4 a month earlier, according to a Bloomberg survey before the data on June 23. A reading above 50 indicates growth. Economists in a separate survey predict the Commerce Department will say on June 25 gross domestic product fell at an annualized rate of 1.7 percent last quarter, the first contraction since the same period in 2011.

“The dollar will continue to consolidate,” said Kazuo Shirai, a trader at Union Bank NA in Los Angeles. “Unless we see the next key U.S. data turn positive, this mini trend of dollar selling is here to stay.”

Fed officials have kept the federal funds target rate at zero to 0.25 percent since 2008 and there’s a 93 percent chance Fed Chair Janet Yellen will keep it there by the end of this year, according to futures data compiled by Bloomberg.

Norway’s currency slipped 0.2 percent to 8.3463 per euro after sliding yesterday by 1.9 percent. It has dropped in each of the past five days, the longest run of declines since the period through June 11, 2013. It weakened 0.4 percent to 6.1418 against the dollar.

Norway Rates

The country’s central bank yesterday pushed back the timing of monetary tightening until the end of next year, versus its previous forecast for the “summer” of 2015. A further weakening of the economic outlook “may warrant a reduction in the key policy rate,” Governor Oeystein Olsen said in a statement.

South Korea’s won fell this week as overseas investors pulled money from local stocks and the authorities signaled they may intervene to weaken the currency.

The currency market has shown herd behavior to some extent and the impact of volatility should be watched, Bank of Korea Governor Lee Ju Yeol said on June 12. The won has risen 12 percent in the past 12 months versus the dollar.

“There’s caution against intervention,” said Son Eun Jeong, a Seoul-based strategist at Woori Futures Co. “The currency market receives steady inflows from exporter deals.”

The won dropped 0.2 percent to 1,020.61 per dollar, weakening 0.3 percent from June 13. The weekly decline is the biggest since the five days ended April 25.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net Pavel Alpeyev, Nicholas Reynolds

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