Dollar Drops Against Most Major Peers as Data Fuel Bets on Fed

The dollar dropped versus most major counterparts as sales of existing U.S. homes unexpectedly fell and Philadelphia-area manufacturing shrank, spurring bets the Federal Reserve will add stimulus that may debase the currency.

Higher-yielding currencies, including the Australian dollar, climbed as risk appetite increased. South Africa’s rand fell against most major peers after the nation unexpectedly cut its benchmark interest rate to bolster its economy. Fed Chairman Ben S. Bernanke yesterday kept open the possibility of more stimulus, including debt purchases under a third round of quantitative easing.

“Foreign currencies are benefiting against the U.S. dollar, particularly because soft U.S. data is driving stronger views of QE3,” Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co., said in a telephone interview. “The recent moderation we’ve seen in U.S. data has lifted the market’s expectations that it’s something that could be coming down the road.”

The dollar fell 0.3 percent to 78.59 yen at 5 p.m. New York time. It touched 78.43 yen, the weakest level since June 5. The greenback was little changed against the euro at $1.2281 after declining earlier to $1.2324, the weakest level since July 10, and appreciating to $1.2229. The 17-nation currency declined 0.3 percent to 96.51 yen.

Purchases of previously owned U.S. homes slid 5.4 percent in June to a 4.37 million annual rate, an eight-month low, figures from the National Association of Realtors showed today. The Fed Bank of Philadelphia’s general economic index was minus 12.9 in July, after falling to minus 16.6 the month before. Readings of less than zero signal contraction.

Aussie Gains

The Australian dollar rose to an 11-week high against the greenback, appreciating as much as 0.8 percent to $1.0444 before trading at $1.0427, up 0.6 percent. The Aussie touched a record high against the euro, gaining as much as 0.9 percent to A$1.1743. New Zealand’s dollar strengthened 0.4 percent to 80.33 U.S. cents.

Norway’s krone rallied 0.7 percent to 6.0567 versus the dollar and gained 0.7 percent to 7.4387 per euro, and Canada’s dollar advanced 0.3 percent to C$1.0074 to the greenback.

Crude oil for August delivery reached $92.94 a barrel in New York, the highest since May 22. Norway and Canada are oil exporters. The MSCI World Index (MXWO) of stocks advanced 0.7 percent, and the Standard & Poor’s 500 Index (SPX) touched 1,380.39, the highest level since May 4.

Volatility Drops

The implied volatility of three-month options on Group of Seven currencies touched 8.63 percent, according to a JPMorgan Chase & Co. measure, the lowest level since November 2007. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profits. The average over the past five years is 12.4 percent.

Australia’s cash rate target is 3.5 percent, and New Zealand’s official cash rate is 2.5 percent. The U.S. benchmark is zero to 0.25 percent.

Bernanke said yesterday the U.S. central bank is “prepared to take further action as appropriate to promote a stronger economic recovery.” The Fed purchased $2.3 trillion of securities from 2008 to 2011 in two rounds of quantitative easing. It also has kept its benchmark interest rate at virtually zero since December 2008.

‘Do Something’

“The markets are inching toward expectations that the Fed will have to do something in terms of a policy initiative, whether that’s QE3 or something else,” Robert Sinche, global head of currency strategy at Royal Bank of Scotland Plc, said today in a telephone interview. “They’re moving in that direction, which is more broadly dollar-negative.”

South Africa’s rand weakened as much as 0.7 percent to 8.2177 per dollar before trading up 0.1 percent at 8.1686. It dropped after the nation’s central bank lowered its benchmark interest rate by half a percentage point, to 5 percent, citing lower inflation and risks to economic growth.

“Any time you see a central bank take action in a loosening direction, that’s only consistent with concerns about global growth,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. (WU), said in a telephone interview.

The dollar erased early losses against the euro after Labor Department data showed more Americans than forecast filed first- time claims for unemployment-insurance benefits last week. Applications climbed by 34,000 to 386,000 in the week ended July 14, the figures showed, versus a Bloomberg survey forecast for 365,000 claims. The volatility in the numbers was due to a change in the timing of annual automobile-plant layoffs, a Labor Department spokesman said.

Dollar Index

The Dollar Index (DXY) will probably rise to 86.20 to 86.40, its highest point since 2010, in the coming months before it begins to “tire” and declines to the 81.44 level during the fourth quarter, according to a July 17 client note by William Moore, a London-based technical strategist at Royal Bank of Scotland Group Plc.

The 86.20 to 86.40 level “would equate to a move to about $1.1881 in euro-dollar,” Moore said via e-mail. “It’s huge resistance, given that a trend line has already uniformly picked the highs from three previous years.”

The index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners, breached the resistance level of 81.31 to 81.78 May 16 before rising to 83.54 on June 1, Moore said. Resistance is an area on a chart where sell orders may be clustered. The index fell 0.2 percent to 82.891 today in New York.

Sterling Strengthens

The euro weakened for a second day against sterling, falling to the lowest in more than three years as Spain ’s 10- year government bond yield climbed above 7 percent following a debt sale today. That was the level that spurred Greece, Ireland and Portugal to seek bailouts.

Spain sold 2.98 billion euros ($3.7 billion) of two-, five- and seven-year notes, in line with its maximum target. The Bank of Spain said demand dropped to 1.9 times the amount of securities offered, compared with 4.26 times the amount at the previous auction last month.

The pound appreciated 0.5 percent to 78.10 pence per euro and reached 77.92 pence, the strongest level since October 2008. The U.K. currency gained 0.5 percent to $1.5725.

The euro dropped 4.5 percent over the past three months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar strengthened 3 percent, and the yen climbed 7.4 percent.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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

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