The dollar rose against most of its major counterparts as concern grew that risk-asset gains have outpaced prospects for economic growth, boosting appetite for the perceived safety of the greenback.
The 17-nation euro reached the highest level in almost two weeks against the dollar earlier after Greece won parliamentary approval for a bailout and as Germany and Portugal sold bonds at auctions. The yen weakened against most of its major peers as concern increased the Bank of Japan will boost stimulus.
“We’re seeing a bit of a corrective strength in the dollar,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “The equity markets are slightly lower and you’re seeing some of the foreign currencies move down. It does reflect a bit of caution.”
The dollar rose 0.1 percent to $1.3216 per euro at 5 p.m. in New York. The euro reached $1.3285 earlier, the highest level since March 8. The dollar fell 0.4 percent to 83.41 yen.
The MSCI World Index (MXWO) of equities fell as much as 0.6 percent before trading down 0.1 percent.
While the dollar rose amid falling stock prices today, the negative relationship between the two assets, intact since October 2008, has broken down during the past two months. The 60-day percent-change correlation rose to minus 43 percent last week from as low as minus 85 percent in December. A reading of minus 100 percent means that the two assets always move in the opposite direction.
“That particular relationship hasn’t been quite as reliable as it’s been in the past,” Bennenbroek said.
Traders are snapping up options on Japan’s currency amid an 11 percent slide over the past six months and a Bloomberg model of option prices signals yen options volatility spreads at the most extreme levels.
The Bloomberg model that analyzes the gap between implied volatility of two different currency pairs signals that the three-month pound-yen versus euro-yen volatility spread is the most expensive of 21 pairs tracked. Traders use implied volatility to gauge expectations for currency swings and in setting prices on options, or contracts that give the right to buy or sell a security within a predetermined time period.
Implied volatility on three-month pound-yen options, at 10.87 percent, is 1.17 percentage points below that on euro-yen options. Pound-yen volatility was 3.54 percentage points below euro-yen volatility in November, after averaging 1.12 percentage points below since the end June 2010.
The pound fluctuated against the dollar as Chancellor of the Exchequer George Osborne cut the U.K.’s top 50 percent income-tax rate and slapped a levy on purchases of the most expensive houses in a budget that maintained his drive to eliminate most of the deficit by 2017.
Minutes of the Bank of England’s Monetary Policy Committee’s March 7-8 meeting showed that the policy makers Adam Posen and David Miles wanted to increase the target for bond purchases by 25 billion pounds ($40 billion) to 350 billion pounds. The seven remaining members voted to keep the current 325 billion-pound target.
“The market is concerned that the BOE was forced to debate quantitative easing even more than they have before and that’s going to be a bit dilutive to the pound,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York.
Sterling advanced 0.1 percent 83.26 pence per euro. It rose 0.1 percent versus the greenback at $1.5873.
The yen fell 3.5 percent in the past month against the currencies of its nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Indexes. The dollar rose 0.7 percent and euro added 0.4 percent.
Merk Investments LLC’s Hard Currency Fund (MERKX) sold its remaining holdings of yen and bought euros today on concern the setting of an inflation goal by the Bank of Japan will lead to a loosening of monetary policy.
“Now as they have this inflation target, the tide is shifting as they’re printing more money and getting in to the inflationary mode,” Axel Merk, founder and president of the Palo Alto, California-based mutual fund, said in a Bloomberg Radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
The $564.1 million fund had allocated 4.2 percent of its holdings to yen and 9.7 percent to the 17-nation European currency as of February.
Finance Minister Jun Azumi said the Bank of Japan (8301) established an inflation target of 1 percent on Feb. 14, replacing earlier wording that the central bank had an “understanding” of where consumer prices should go. It also said it would add 10 trillion yen ($119 billion) yen of stimulus to the economy.
The euro was supported after Greece’s Prime Minister Lucas Papademos won approval for a 130-billion-euro ($172 billion) aid package. U.S. Treasury Secretary Timothy F. Geithner said today that “Greece is making progress toward sustainability.”
“Whether they get there or not is going depend hugely on whether they can sustain political support,” Geithner told the House Financial Services Committee in Washington. He added that Europe has the means to solve its debt crisis on its own.
Germany sold 5 billion euros of notes due in March 2014 at an auction today. Investors bid for 1.8 times the amount allotted, the same as the previous sale. The nation also sold 2 billion euros of inflation-linked bonds.
Portugal sold 1.61 billion euros of one-year bills at an average yield of 3.65 percent, down from 4.94 percent at the previous auction on Feb. 15. Investors bid for 2.5 times the amount allotted, versus a bid-to-cover ratio of 2.02 times last month. The nation also sold 382 million euros of 119-day debt.
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