Dollar Gains as Manufacturing Report Boosts U.S. Outlook

The dollar climbed from a 10-week low against the yen after a U.S. factory gauge unexpectedly advanced in April, easing concern the economic recovery is flagging and damping bets the Federal Reserve will introduce more stimulus.

The greenback rose from the lowest in almost a month against the euro as the data highlighted a divergence between U.S. economic performance and that of Europe, where reports over the past week showed the U.K. and Spain have fallen into recession. Australia’s dollar slid versus all of its major peers after the nation’s central bank cut interest rates more than forecast. The pound fell after U.K. factory growth slowed.

“This move may simply reflect the fact the probability of quantitative easing has been materially reduced in light of the better economic performance,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank. “Today is fruitful grounds for speculation.”

The U.S. currency gained 0.3 percent to 80.09 yen at 5 p.m. New York time after falling earlier to 79.64, the weakest level since Feb. 21. It was little changed at $1.3237 per euro after weakening 0.3 percent earlier to $1.3284, the lowest since April 3, and gaining as much as 0.3 percent. Europe’s 17-nation currency gained 0.3 percent to 106.02 yen.

Markets in western Europe, except the U.K., Ireland and Denmark, were closed for the May Day holiday. Most Asian markets were also closed for public holidays.

Dollar Index

Intercontinental Exchange Inc.’s Dollar Index, which measures the greenback against the currencies of six major U.S. trade partners, added as much as 0.1 percent to 78.977 before paring its advance to 78.815.

The Institute for Supply Management’s index of U.S. manufacturing rose to 54.8 in April, the highest since June, from 53.4 a month earlier, the Tempe, Arizona-based group’s report showed. Economists in a Bloomberg survey forecast a decline to 53. Readings greater than 50 signal growth.

The dollar reversed its earlier drop against the yen as the data reduced bets the Fed will print more dollars to promote economic growth.

While the central bank refrained at a two-day meeting last week from new actions to boost the economy, Chairman Ben S. Bernanke said it’s “prepared to do more” if necessary. The Fed bought $2.3 trillion of bonds in two rounds of quantitative easing from December 2008 to June 2011 to lower borrowing costs. The Dollar Index (DXY) fell 14 percent during that period.

Mexico’s peso was the biggest winner among the dollar’s 16 most-traded counterparts tracked by Bloomberg, and Canada’s dollar also advanced after the ISM data. The U.S. is the biggest trading partner of both nations.

‘Two Channels’

“In general, positive developments for the U.S. economy are going to help the Canadian dollar,” Greg Anderson, the North American head of G-10 currency strategy at Citigroup Inc. in New York, said in a telephone interview. The Canadian currency is helped “through two channels: improved risk appetite and improved sentiment toward North America specifically.”

The peso strengthened 0.7 percent to 12.9162 per dollar, and the Canadian currency advanced 0.2 percent to 98.54 cents to the greenback.

Canada’s dollar was the second best performer among 10 developed nations over the past six months after the New Zealand dollar, according to Bloomberg Correlation-Weighted Indexes, rising 3.7 percent. The U.S. dollar gained 0.6 percent, and the kiwi strengthened 3.9 percent.

European Manufacturing

A euro-zone manufacturing and services gauge dropped to 47.4 in April from 49.1 in March, London-based Markit Economics said last week. A purchasing-manager index of German manufacturing fell to 46.3 for April, from 48.4 in March.

Sterling weakened versus the dollar after data based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply showed U.K. factory output fell to 50.5 in April from 51.9 in March. Data last week showed Britain’s economy re-entered a recession last quarter.

The pound declined as much as 0.3 percent to $1.6187 before trading little changed at 1.6221. It was little changed at 81.61 pence per euro after falling as much as 0.5 percent earlier. Sterling appreciated yesterday to 81.23 pence, the strongest since June 2010.

“The PMI data clearly weighed on sterling,” said Jane Foley, a senior currency strategist at Rabobank International in London. “There’s some clear profit-taking in sterling, as it’s come a long way against both the euro and dollar.”

Spanish GDP

A report yesterday showed Spain’s gross domestic product fell 0.3 percent in the first quarter, the same as in the previous three months, marking the nation’s second recession since 2009.

The U.S. economy grew at an annual pace of 2.2 percent in the first three months of the year, after expanding 3 percent in the fourth quarter, a report showed last week.

American employers added 161,000 jobs in April, up from 120,000 the previous month, according to a Bloomberg survey before the Labor Department reports the data on May 4.

The Aussie dollar dropped for a second day against the greenback after the Reserve Bank of Australia lowered its overnight cash rate target to 3.75 percent from 4.25 percent, the deepest cut in three years.

The Australian currency slid 0.9 percent to $1.0334 and touched $1.0305, the lowest level since April 24.

The greenback will probably extend losses versus the yen after it completed a so-called dead-cross formation with its four-week moving average dropping below its 13-week line, Bank of Tokyo-Mitsubishi UFJ Ltd analysts wrote in a note. The U.S. currency may target the 26-week moving average, they wrote. That level lies at 79.23 yen, according to data compiled by Bloomberg.

The implied volatility of three-month options on Group of Seven nations’ currencies rose to 9.15 percent today after reaching 8.84 percent yesterday, the lowest intraday level since November 2007. The average over the past decade is 10.6 percent.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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