Dollar Gains Amid Fed Taper Timing Speculation; Yen Declines

The dollar gained versus the euro and yen before the Federal Reserve starts a two-day policy meeting tomorrow as investors weigh whether the central bank will curb bond purchases.

The Dollar Index snapped a five-day drop before a report tomorrow economists said will show the cost of living in the U.S. rose in May after two months of declines. The yen fell at least 0.3 percent versus all 16 of its major peers as stocks gained, damping demand for haven assets. The euro climbed against the yen before data on the common-currency bloc’s trade balance as inflows to the region support this year’s best-performing developed-market currency.

“We’re generally positive on the dollar for the rest of this year,” said Mitul Kotecha, the global head of foreign-exchange strategy in Hong Kong at Credit Agricole SA. (ACA) “We would see the strengthening of the U.S. economy also giving support to push yields higher alongside this impact of less Treasury buying by the Fed.”

The dollar rose 0.7 percent to 94.96 yen at 8:33 a.m. London time, following a 3.3 percent decline last week. It gained 0.2 percent to $1.3327 per euro. The euro added 0.8 percent to 126.59 yen after posting a 2.6 percent slump last week, the most since the five days ended July 6.

The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six U.S. trade partners, added 0.2 percent to 80.791.

Bond Buying

Fed Chairman Ben S. Bernanke said on May 22 the central bank could reduce its monthly purchases of $45 billion of Treasuries and $40 billion of mortgage-backed securities, a program known as quantitative easing, if the employment outlook shows sustained improvement.

Benchmark 10-year Treasury yields were little changed at 2.14 percent after reaching 2.29 percent on June 11, the most since April 4, 2012.

The JPMorgan Global FX Volatility Index rose to a one-year high of 11.43 percent on June 13. The gauge has climbed from 7.05 percent in December, the lowest since July 2007, and was at 10.49 percent today.

“The changing prospects for U.S. quantitative easing are causing great confusion,” said Kengo Suzuki, the chief currency strategist at Mizuho Securities Co. in Tokyo, a unit of Japan’s third-biggest financial group by market value. “The market consensus is that Bernanke will clarify this week the difference between QE tapering and policy tightening and emphasize the point that monetary easing is still needed.”

The U.S. consumer-price index rose 0.2 percent in May after falling 0.4 percent in April, economists estimated in a Bloomberg News survey before Labor Department figures released tomorrow.

Asian Stocks

Japan’s currency dropped versus the dollar as Asian stocks climbed for a second day with the MSCI Asia Pacific Index rising 1.3 percent. The Topix (TPX) index climbed 2.7 percent, after slumping 16 percent over the previous four weeks.

“Some of the calm in markets today and strengthening of Japanese equities play negatively for the yen,” said Kotecha of Credit Agricole.

The yen’s 14-day relative-strength index against the greenback climbed to 70 on June 14, a level that some traders see as a signal that an asset’s price has risen too far, too fast and is due to reverse course. It was at 65 today. The RSI for Japan’s currency against the euro was 61.

Trade Balance

The European Union’s statistics office in Luxembourg is due to release April trade data for the region today. Euro-area exports exceeded imports by 18.7 billion euros in March on a seasonally adjusted basis, the biggest trade surplus on record, figures showed last month.

The 17-nation euro region will post a current-account surplus this year equivalent to 1.7 percent of gross domestic product, according to economist estimates compiled by Bloomberg. That compares with a 2.8 percent deficit for the U.S. and a 1 percent surplus for Japan. A surplus in the balance, the broadest measure of international trade, reduces reliance on foreign capital to fund deficits.

“We spend so much time waiting for the next Cyprus or the next Greece that sometimes we can’t simply see the good news,” said Robert Rennie, a Sydney-based chief currency strategist at Westpac Banking Corp. (WBC) “There’s a lot to be said about the euro being a default asset at the moment if we’re worried about a slower Asia and if it’s not clear to us whether the Fed is going to be tapering sooner or later.”

Bearish Bets

Futures traders cut bearish bets on the 17-nation currency against the dollar at a record pace in the past two weeks.

The difference in the number of wagers on a slide in the euro compared with those on an advance narrowed by 77,111 between May 28 and June 11, according to figures from the Washington-based Commodity Futures Trading Commission. That’s the biggest two-week advance in bullish euro sentiment on record.

The euro has strengthened 3.6 percent this year, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has risen 2.5 percent, while the the yen has lost 7.3 percent.

Australia’s dollar rose versus all but one of its 16 major peers, extending its first weekly gain against the greenback in six, amid speculation record bets on the currency’s decline may be overdone.

“Positioning is at record extremes” in the Australian dollar, said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. Trading “should remain largely choppy, but there’s a risk of potential short-covering,” she said. A short position is a bet an asset’s price will fall.

The Australian dollar rose 0.4 percent to 96.08 U.S. cents from June 14, when it dropped 0.7 percent, the most since June 7.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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