Dollar Climbs Most in Two Months on Bets Fed Will Slow Purchases

The dollar gained the most in almost two months against the euro amid bets the Federal Reserve will slow its asset purchases under the quantitative-easing stimulus strategy on signs the world’s biggest economy is accelerating.

The greenback rose versus all of its 16 most-traded peers this week as U.S. retail sales unexpectedly increased, a consumer-confidence gauge climbed and leading indicators beat forecasts. The euro fell to a six-week low versus the dollar as the currency bloc’s economy shrank for a sixth straight quarter. The yen slid for a third week. Fed Chairman Ben S. Bernanke testifies to Congress next week on the economic outlook.

“There’s been a lot of excitement about the U.S. economic data,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a telephone interview May 16. “So far, the interpretation of any tapering has been quite hawkish. The dollar is riding on optimism rather than a significant shift in fundamentals.”

The U.S. currency strengthened 1.2 percent to $1.2839 per euro this week in New York in the biggest drop since the five days ended March 29. It touched $1.2797 yesterday, the strongest since April 4. The dollar appreciated 1.6 percent to 103.21 yen and touched 103.31, the strongest level since October 2008. Japan’s currency fell 0.4 percent to 132.51 per euro.

The greenback has rallied 5.4 percent this year, the most among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has advanced 2.3 percent, while the yen has dropped 13 percent in the largest loss.

Winners, Losers

The Brazilian real was the best performer this week among the dollar’s 16 most-traded counterparts tracked by Bloomberg, declining just 0.7 percent versus the U.S. currency. South Africa’s rand was the biggest loser, tumbling 3 percent, while the Australian dollar was the second-worst performer, with a 2.9 percent loss.

Futures traders increased their wagers that the yen and euro will fall against the greenback, 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 yen compared with those on a gain -- so-called net shorts -- was 88,407 on May 14, compared with net shorts of 78,560 a week earlier. Net-short bets that the euro will fall against the dollar rose to 46,921, from 33,533 a week earlier.

Futures traders reversed bets the Australian dollar will gain against the its U.S. peer. Net shorts the Aussie versus the greenback totaled 13,450, the most since June 2012, versus net longs of 6,630 a week earlier.

Fed Tapering

The dollar extended gains after Fed Bank of San Francisco President John Williams said May 16 that quickening economic growth and gains in the job market may prompt the central bank to begin tapering its bond buying as soon as this summer. Williams was one of the first Fed officials to advocate open-ended bond purchases. Philadelphia Fed Bank President Charles Plosser said a week earlier he’d favor a June reduction.

The Fed is buying $85 billion a month of Treasury and mortgage bonds to push down borrowing costs and spur growth. Bernanke is scheduled to speak to the Joint Economic Committee of Congress on May 22. Minutes of the Fed’s last policy meeting will be released the same day.

U.S. retail sales rose 0.1 percent in April, after a 0.5 percent drop in March, the Commerce Department said May 13. The Conference Board’s index of U.S. leading indicators increased 0.6 percent in April, and the Thomson Reuters/University of Michigan preliminary index of U.S. consumer sentiment climbed to 83.7 in May, the highest since July 2007, data showed yesterday.

ECB, BOJ

“It’s the U.S. economy that’s in the vanguard, and that explains why the dollar continues to advance,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co., said yesterday in New York. “You also have very much in the forefront that the Federal Reserve might exit its quantitative easing sooner than later, while the Bank of Japan is going to do more QE and the European Central Bank is favored to do more.”

The euro fell for a second week against the greenback as data showed gross domestic product in the 17-nation area shrank 0.2 percent last quarter, the European Union said. ECB President Mario Draghi pledged on May 2 to lower rates again if needed following a cut in the benchmark to 0.5 percent.

“Weak growth data from the euro zone is certainly adding to the euro’s downside potential,” Ravi Bharadwaj, a senior market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a May 15 telephone interview. “It raises pressure on the ECB to continue to maintain an accommodative stance towards monetary policy.”

The yen has dropped 10 percent against the dollar since April 3, the day before the Bank of Japan announced unprecedented stimulus measures to stem 15 years of deflation.

Aussie, Rand

The Australian dollar fell to an almost one-year low versus the greenback after the government’s forecast of slower growth fanned bets the central bank will cut borrowing costs further. Policy makers lowered the cash rate target a quarter-percentage point to 2.75 percent on May 7.

The Aussie ended the week down 2.9 percent to 97.30 U.S. cents and touched 97.11 yesterday, the lowest since June 5.

South Africa’s rand slumped to a four-year low against the dollar on concern that falling metal prices and labor unrest threaten the nation’s credit rating and economic growth.

The rand sank 3 percent to 9.4038 per dollar, tumbling yesterday to 9.4413, its weakest level since April 2009.

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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