Dollar Falls Before Fed as European Confidence Climbs

The dollar weakened to the lowest level since November 2011 versus the euro as European economic confidence increased and amid speculation the Federal Reserve will restate its commitment to monetary stimulus.

The greenback pared a gain against the yen as the U.S. economy unexpectedly contracted in the fourth quarter, restrained by the biggest plunge in defense spending in 40 years and dwindling inventories as household purchases picked up. The New Zealand dollar slid against all of its 16 most-traded counterparts amid bets the nation’s central bank will try to curb the currency’s strength.

“It continues to be a reduction in the risk premium for euros,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a phone interview. “We had a lot of risk last year, and as that probability gets removed we’ve seen less stress in Europe. Now you’re seeing more investors come back into the euro with a medium-term view on it.”

The dollar fell 0.6 percent to $1.3573 per euro at 12:54 p.m. New York time and reached $1.3578, the weakest since Nov. 18, 2011. The U.S. currency appreciated 0.4 percent to 91.07 yen after rising 0.8 percent earlier to 91.41, the highest since June 2010. The euro touched 123.86 yen, the strongest level since May 2010, before trading at 123.60, up 1 percent.

The Fed will issue a policy statement at about 2:15 p.m. New York time after a two-day meeting. The central bank is buying $85 billion a month of Treasuries and mortgage bonds to spur the economy and reduce unemployment in its third round of quantitative easing.

Latest Purchases

Fed Chairman Ben S. Bernanke’s latest bond buying will reach $1.14 trillion before he ends the program in the first quarter of 2014, according to the median estimate in a Bloomberg News survey of economists. The central bank bought $2.3 trillion of securities from 2008 to 2011 in its first two efforts under the strategy.

The New Zealand dollar slid as investors speculated the Reserve Bank of New Zealand will make comments intended to weaken the currency as officials set monetary policy at a meeting tomorrow.

The kiwi, as the currency is nicknamed, dropped 1 percent to 83.12 U.S. cents. Australia’s dollar depreciated 0.5 percent to $1.0426.

Real Falls

Brazil’s real fell for the first time in six days against the greenback as Finance Minister Guido Mantega said a weaker currency helps the nation’s industry. It dropped as much as 0.7 percent, its biggest intraday slide since Dec. 17, to 1.9999 per dollar before trading at 1.9894, down 0.2 percent.

The Indian rupee rose to a three-month high versus the dollar on optimism the first interest-rate cut by the central bank in nine months will spur economic growth, attracting investors. The Reserve Bank of India lowered its benchmark repurchase rate to 7.75 percent from 8 percent yesterday.

India’s currency gained 0.9 percent to 53.3050 per dollar and reached 53.2750, its strongest level since Oct. 18.

The euro advanced as an index of executive and consumer sentiment in the 17-nation euro region increased to 89.2 from a revised 87.8 in December, the European Commission in Brussels said today. That’s the highest since June. Economists in a Bloomberg News survey forecast a rise to 88.2.

The shared currency may strengthen further against the dollar as the region’s economy exceeds forecasts, according to Alan Ruskin, global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG in New York. He spoke in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene.

Surprise Index

Citigroup Inc.’s economic surprise index for the euro area, which measures how data are beating or trailing median forecasts, rose on Jan. 25 to 66.50, the most since Jan. 31, 2011. It was 63.60 today. Positive readings suggest the economic releases have on balance been better than the Bloomberg consensus.

The euro has gained 3 percent in 2013, the biggest advance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has lost 0.2 percent, and the yen has tumbled 5.5 percent.

The European currency rose today even as data showed Spain’s recession deepened in the fourth quarter more than forecast. The Madrid-based National Statistics Institute said gross domestic product fell 0.7 percent from the previous quarter, when it declined 0.3 percent.

Region Stabilizing

While “it still doesn’t look good in southern Europe,” other reports have signaled the region as a whole is stabilizing and the euro may climb to $1.37 by the end of March, Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen, said in an interview. There’s a 77 percent chance of the euro climbing to that level by the end of the first quarter, according to options data compiled by Bloomberg.

The yen pared its loss versus the dollar after Commerce Department data showed U.S. gross domestic product declined at a 0.1 percent annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession. The Bloomberg poll’s estimate was a 1.1 percent increase.

The Japanese currency fell against the majority of its 16 most-traded counterparts. It has lost 5.6 percent against the greenback over the past month as Prime Minister Shinzo Abe has pushed for “bold monetary policy” to weaken the currency and defeat deflation.

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.