Dollar Drops on Weak Data as Fed Meets; Euro Gains on ECB Bets

The dollar fell versus 14 of its 16 most-traded peers as business activity in the U.S. unexpectedly shrank for the first time in more than three years amid bets the Federal Reserve won’t slacken its bond buying under quantitative easing.

The euro climbed against the dollar, reversing earlier losses, amid speculation that action by the European Central Bank on May 2 will bolster the 17-nation region’s economy. The yen gained versus the greenback, paring its seventh straight monthly loss, as U.S. Treasury 10-year note yields touched the lowest this year. The Fed opened a two-day policy meeting.

“What I’d look for is continued signaling that we’ll continue to buy bonds at approximately the current pace, and that the economy is only recovering gradually,” Nick Bennenbroek, the head currency strategist at Wells Fargo & Co. in New York, said in an interview on Bloomberg Television’s “Lunch Money” with Julie Hyman. “If you get those kinds of signs, it’s going to be a relative non-event. They will probably weigh on the dollar against growth-sensitive currencies.”

The dollar lost 0.5 percent to $1.3168 per euro at 5 p.m. New York time and touched $1.3186, the weakest level since April 17, after gaining 0.3 percent earlier. It declined 2.6 percent this month.

The Japanese currency added 0.3 percent to 97.45 per dollar after weakening 0.4 percent earlier. It last fell for a seventh month against the greenback in 2001. Against the euro, the yen declined 0.2 percent to 128.32 today after appreciating 0.7 percent earlier.

Yields Fall

Treasury 10-year yields fell as low as 1.64 percent, the least since Dec. 12. That narrowed the gap with comparable Japanese government bond yields to 1.05 percentage points, the least in two weeks, curbing the dollar’s allure over the yen.

“The disinflationary tendencies that are building into the U.S. and the risk that the debate shifts to expanding rather than tapering QE has conspired to keep the U.S. under pressure,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said in a phone interview. “The fact we’ve now seen U.S. 10-years testing the lows of the year is keeping the U.S. dollar on the defensive.”

Trading in over-the-counter foreign-exchange options totaled $24 billion, compared with $19 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $5 billion, the largest share of trades at 21 percent. Euro-dollar options were the second most actively traded, at $4.1 billion, or 17 percent.

Below Average

Dollar-yen options trading was 55 percent below the average for the past five Tuesdays at a similar time in the day, and euro-dollar options trading was 31 percent below, according to Bloomberg analysis.

A gauge of currency-market volatility fell to the lowest level since Jan. 31. The JPMorgan G7 Volatility Index, based on three-month futures options on Group of Seven nations’ currencies, ended the day at 8.79 percent, the lowest level since Jan. 30. It has averaged 9.07 percent in 2013.

India’s rupee rose versus most of 31 major peers after the country said it will cut a levy on foreign investment in rupee- denominated government and corporate bonds to attract overseas capital. The rupee gained 0.8 percent to 53.8088 per dollar.

The Czech koruna dropped against the euro as Credit Suisse Group AG said previous gains to the strongest level in six weeks may prompt the central bank to weaken the currency. The Czech National Bank meets May 2. The koruna declined 0.5 percent to 25.804 to the shared currency.

ECB Bets

The ECB will cut its main refinancing rate by a quarter- percentage point to a record 0.5 percent, according to economists surveyed by Bloomberg News.

The euro fell earlier after data showed consumer prices in the 17-nation bloc increased an annualized 1.2 percent in April, versus a 1.7 percent pace a month earlier. Analysts in a Bloomberg survey forecast a drop to 1.6 percent. The jobless rate in the region rose to a record 12.1 percent in March from 12 percent a month earlier.

The shared currency reversed losses “because the market is optimistic the ECB will do something beyond the rate cut,” Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, said in a telephone interview. “The battle is being fought over what kind of additional stimulus the ECB is likely to provide. The more the market anticipates additional stimulus through credit channels and so on, the stronger the euro will trade.”

The euro has gained 1.7 percent in the past month versus nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes, the best performance. The dollar fell 1 percent and the yen tumbled 5.8 percent.

BOJ Stimulus

The yen’s gain today pared its monthly slump against the dollar to 3.3 percent. The currency has slid as unprecedented stimulus announced by the Bank of Japan on April 4 spurred investors to sell it.

The Dollar Index (DXY) fell to a two-month low after the MNI Chicago Report’s business barometer dropped to 49 in April, the lowest since September 2009. A reading of less than 50 signals contraction. The median forecast in a Bloomberg survey was 52.5. The currency index, which Intercontinental Exchange uses to track the greenback against its peers at six major U.S. trade partners, sank as much as 0.7 percent to 81.598.

The Commerce Department said April 26 the economy grew at a 2.5 percent annual rate in the first quarter, trailing a Bloomberg survey’s forecast for 3 percent.

The Fed is buying $85 billion of bonds a month in the third round of its quantitative-easing strategy to put downward pressure on borrowing costs. While Chairman Ben S. Bernanke said after the central bank’s March meeting that further labor-market gains were needed to consider reducing monetary easing, minutes showed officials discussed slowing the pace of buying.

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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