Dollar Index Rallies to Highest Since 2010 on Fed; Aussie Slides

The Dollar Index (DXY) climbed to the highest level in almost three years amid speculation the Federal Reserve is moving closer to ending its program of asset purchases on signs U.S. economic growth is improving.

The greenback rose versus all of its 16 most-traded peers as U.S. leading indicators improved and consumer confidence rose to the highest in almost six years. The American currency climbed past 103 yen for the first time since October 2008. The Australian and New Zealand dollars slid on concern slowing global inflation will damp demand for commodities.

“Investors are gradually getting more structurally positive on the U.S. economy, and that has been supporting the dollar,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “The confidence data today was extremely strong, as was the leading indicators, which supports the view that the U.S. economy is not in such a bad shape.”

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against currencies of six U.S. trading partners, climbed as much as 0.9 percent to 84.371, the highest level since July 2010, before trading at 84.207 at 5 p.m. New York time, up 0.7 percent.

The greenback appreciated 0.3 percent to $1.2839 per euro, extending the week’s gain to 1.2 percent. The dollar rose 0.9 percent to 103.21 yen and touched 103.31, advancing 1.6 percent on the week. The yen fell 0.6 percent to 132.51 per euro.

A gauge of currency-market volatility rose to the highest level in 11 weeks. The JPMorgan G7 Volatility Index, based on three-month futures options on Group of Seven nations’ currencies, reached 9.96 percent, the highest since Feb. 27. It has averaged 9.1 percent in 2013.

Options Trading

Trading in over-the-counter foreign-exchange options totaled $42 billion, compared with $47 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 euro-dollar exchange rate amounted to $9.2 billion, the largest share of trades at 22 percent. Dollar-yen options were the second most-actively traded, at $7.9 billion, or 19 percent. Australian-U.S. dollar options were No. 3 at $3.7 billion, or 9 percent.

Euro-dollar options trading was 193 percent above the average for the past five Fridays at a similar time in the day, according to Bloomberg analysis. Dollar-yen options trading was 44 percent below average.

Aussie Reversal

Futures traders reversed their bets the Australian dollar will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the Australian dollar compared with those on a gain -- so-called net shorts -- was 13,450 on May 14, the most since June 2012, versus net longs of 6,630 a week earlier.

The Australian dollar dropped as much as 1 percent to 97.11 U.S. cents, the weakest since June 5, before trading at 97.30 cents, down 0.8 percent. New Zealand’s dollar, known as the kiwi, slid 1.2 percent to 80.61 U.S. cents, a level unseen since Nov. 16, before trading at 80.65, down 1.1 percent.

The Standard & Poor’s GSCI Index of 24 raw materials slid 7.8 percent from Feb. 14, when it reached a high for 2013, through yesterday. It was up 0.7 percent today.

Loonie Weakens

The Canadian dollar dropped against most major peers after inflation fell to its slowest in more than three years, bolstering the case for lower interest rates. Canada’s consumer price index rose 0.4 percent in April from a year ago, compared with a 1 percent gain the prior month, the government said. It was the slowest since October 2009. The Bank of Canada has kept its benchmark rate at 1 percent since 2010.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, depreciated 0.8 percent to C$1.0281 per U.S. dollar and touched C$1.0313, the weakest since March 8.

South Africa’s rand fell to a four-year low on concern labor unrest and lower commodities will damp growth. The currency sank 0.9 percent to 9.4038 per dollar and reached 9.4413, the weakest level since April 2009.

The dollar jumped versus the euro and yen as the Conference Board’s index of U.S. leading indicators, a gauge of the outlook for the next three to six months, climbed 0.6 percent in April, the New York-based group said today. A Bloomberg survey called for a 0.2 percent increase.

The Thomson Reuters/University of Michigan preliminary index of U.S. consumer sentiment rose to 83.7 in May, the highest since July 2007, from 76.4 the prior month. A Bloomberg survey predicted a gain to 77.9.

‘Dollar Story’

“It’s really a dollar story,” said Neil Jones, the head of hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “The world is really watching the U.S. data at the moment.”

Fed Bank of San Francisco President John Williams said yesterday economic growth and job-market gains may prompt the central bank to taper its $85 billion of monthly bond buying under the quantitative-easing stimulus strategy.

Williams, who doesn’t vote on policy this year, was one of the first Fed officials to advocate the central bank buy bonds without setting a limit on the duration or total for such purchases. The Federal Open Market Committee said May 1 it’s prepared to increase or decrease the size of its purchases as officials gauge the health of the economy.

The FOMC will release minutes of its April 30-May 1 meeting on May 22.

“Market anticipation that the Fed minutes next week will reflect that kind of thinking is probably underpinning demand for the dollar,” said Henrik Gullberg, a London-based currency strategist at Deutsche Bank AG.

The greenback has appreciated 5.5 percent in 2013 against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes, the best performance. The yen slumped 13 percent, the biggest loss, while the euro gained 2.3 percent.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

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

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