Dollar Falls After Data on Fed Easing Speculation

The dollar fell for a second day against the yen after reports signaled a slowing U.S. economy, boosting the case for the Federal Reserve to take more steps to bolster growth.

The euro rose versus the dollar on bets its decline since April was overdone and after Reuters reported European central banks are preparing for coordinated action, if needed, after the Greek elections this weekend. The U.S. currency declined versus all of its 16 major peers after initial jobless claims rose last week and inflation declined in May. New Zealand’s dollar gained as the central bank gave no indication it would cut interest rates.

“People are betting on quantitative easing at the next meeting,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London. “People are betting on the fact that the bears are too bearish, the world is not going to end and with a little bit of luck in Greece over the weekend, it’s not going to take a step off the cliff.”

The dollar depreciated 0.2 percent to 79.35 yen at 5 p.m. in New York after falling 0.1 percent yesterday. The U.S. currency dropped 0.6 percent to $1.2633 versus the euro. The 17- nation currency added 0.4 percent to 100.24 yen.

European Action

The coordinated European central banks’ action would come as an effort to provide liquidity to the markets, Reuters reported, citing officials linked to the Group of 20. Ministers will hold a conference call to discuss the Greek election outcome June 17, Reuters said.

The pound extended its gain against the dollar after Chancellor of the Exchequer George Osborne and Bank of England Governor Mervyn King announced two programs to increase the flow of credit amid a deteriorating outlook in the euro area.

The U.K. central bank will activate an unused plan to inject at least 5 billion pounds ($7.8 billion) a month into the financial system. Another plan will allow lenders to swap assets with the central bank in return for money to be lent to companies and households. The Treasury will indemnify the bank for any losses.

The pound rose 0.4 percent to $1.5563 and pared its loss against the euro to 81.18 pence from as weak as 81.21 pence earlier.

High Yield

Higher-yielding currencies, including the Australian and Canadian dollars, rose as stocks and commodities advanced amid demand for higher-yielding assets.

The Aussie strengthened 0.9 percent to $1.0024 and the Canadian dollar rose 0.8 percent to C$1.0226 against the greenback.

The Standard & Poor’s 500 Index (SPX) rose 1.1 percent and the Thomson Reuters/Jefferies CRB Index of raw materials gained 1 percent.

Hedge funds and other large speculators increased their bets on a drop in the euro against the dollar to a record high last week, Commodity Futures Trading Commission data showed June 8. Futures traders increased net euro short contracts to 214,418 in the week ended June 5, the figures showed.

The shared currency closed above its 20-day moving average, at $1.2543 yesterday, for the first time since May 1, a move that may be helping it gain today, Brown Brothers Harriman & Co. wrote in a note to clients.

Bernanke Policy

“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Fed Chairman Ben S. Bernanke told lawmakers on June 7. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”

The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing from 2008 through 2011 to stimulate growth through lower borrowing costs. The central bank meets June 19-20.

“The dollar is susceptible to weakening because expectations for additional easing are rising ahead of the policy meeting next week,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp. (8711), a currency-margin company. “A decline in employment and the economy is the biggest concern for the Fed.”

Economic Data

The consumer price index fell 0.3 percent, more than forecast and the biggest drop since December 2008, after no change the prior month, the Labor Department reported today in Washington. Economists projected a 0.2 percent decrease, according to the median estimate in a Bloomberg News survey.

Claims for jobless benefits unexpectedly climbed by 6,000 to 386,000 in the week ended June 9 from a revised 380,000 the prior week that was more than first estimated, Labor Department figures showed today in Washington. Economists projected claims would fall to 375,000, according to the median estimate in a Bloomberg News survey.

The euro fell earlier against the yen after Italy’s costs of borrowing for three years climbed to the highest since December at an auction. Investors were also waiting for an election in Greece on June 17 that may indicate whether the nation will remain in the euro bloc.

Oanda Corp., the New York-based operator of an online currency-trading platform, won’t accept transactions for a nine hour period on the day of the election because the results may cause excessive price swings.

Volatile Decision

“There is the potential for extreme exchange-rate volatility at a time when global currency markets are closed,” Oanda said. “By halting trading and holding the closing prices steady during this period, we aim to shelter traders from the potential for price spikes.”

Moody’s Investors Service yesterday cut Spain’s rating three steps to Baa3, one level above junk, citing its increased debt burden and weakening economy. The Spanish 10-year yield climbed as much as 25 basis points, or 0.25 percentage point, to a euro-era record 6.998 percent.

“The global economy is definitely moderating and there’s this fear that’s related to the weakness of things that are happening in Europe,” said Mark McCormick, a currency strategist at Brown Brothers Harriman in New York. “We’re going through some positioning, squaring up ahead of the Greek election. There’s a lot of uncertainty with the outcome for Greece.”

The euro has weakened 1.2 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar gained 2.7 percent, and the yen advanced 8.7 percent.

New Zealand’s dollar rallied against all 16 major counterparts after the central bank gave no immediate sign it would cut interest rates when it kept its benchmark at a record low. Reserve Bank of New Zealand Governor Alan Bollard said the current exchange rate is more comfortable than March and signaled he expects to hold the 2.5 percent official cash rate till mid-2013.

The kiwi rose 1.2 percent to 78.25 U.S. cents, touching the strongest since May 14.

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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