Dollar Gains Before Fed Meetings on Taper-Timing Speculation

The dollar strengthened against the majority of its 16 most-traded counterparts amid speculation about when the Federal Reserve will begin to taper its monetary stimulus.

The U.S. currency briefly pared gains and fell versus the euro amid conflicting reports before the central bank starts a two-day policy meeting tomorrow. The yen fell versus the greenback for the first time in five days as stocks gained, reflecting reduced haven demand. The euro climbed to almost a four-month high against the dollar as data showed the 17-nation bloc’s trade surplus was at almost a record in April.

“The whole day has been driven by U.S. dollar moves,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “The idea that the Fed might temper their purchases has thrown a bit of a cold shower on investors.”

The dollar rose 0.2 percent to 94.51 per yen at 5 p.m. New York time, after falling 3.3 percent last week, the most since July 2009. Japan’s currency slid 0.6 percent to 126.32 per euro after appreciating 2.7 percent last week, the most since the five days ended July 6. The euro added 0.2 percent to $1.3367, almost the highest since Feb. 13.

Options Trade

Trading in over-the-counter foreign-exchange options totaled $26.5 billion, compared with $34.6 billion on June 14, 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 was $7.4 billion, the largest share of trades at 28 percent. Australian dollar-U.S. dollar options were the second most-actively traded, at $3.8 billion, or 14 percent.

Yen-dollar options trading was 1 percent more than the average for the past five Mondays at a similar time in the day. Aussie-greenback options trading was 65 percent more than average.

The Brazilian real decreased for a second day against the dollar as Goldman Sachs Group Inc. cut the country’s growth forecast to 2.5 percent from 3.3 percent, citing “disappointing” first-quarter figures. The currency fell 0.9 percent to 2.1712 per dollar after earlier declining to 2.1777, its weakest level since May 2009.

Peso Drops

Mexico’s peso fell versus all 16 of its most-traded peers as RBC Capital Markets said it could see “some short-term losses” and potentially cut rates after the Fed’s policy statement on June 19. The currency depreciated 1 percent to 12.8361 per dollar after falling to 12.8796.

India’s rupee dropped the most in a week as the central bank left borrowing costs unchanged amid concern U.S. monetary policy makers will signal a reduction in asset purchases that have boosted inflows to emerging markets.

The Reserve Bank of India held its repurchase rate at 7.25 percent today. The rupee slid 0.6 percent to 57.8663 per dollar, the biggest drop since June 10.

The Stoxx Europe 600 Index of shares gained 1.2 percent while Japan’s Topix index added 2.7 percent and the Standard & Poor’s 500 Index climbed 0.8 percent. Yields (USGG10YR) on 10-year Treasuries rose to 2.18 percent after touching 2.1 percent on June 14, the lowest level in a week.

Risk-On Environment

“It looks like there’s some risk-on back on the table,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc., by phone from New York. “The obvious focus on the week is going to be the Fed meeting, and I think we’re going to sidestep around that until then.”

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, known as quantitative easing, if the employment outlook shows sustained improvement.

The Financial Times reported Bernanke will probably signal the central bank’s monthly purchases will be reduced, while further cuts will depend on the economy. The newspaper’s reporter later posted on Twitter that he didn’t have confirmation from Fed officials and urged investors to “chill out.”

The euro-area trade surplus narrowed to 16.1 billion euros from a revised 18.1 billion euros in March, the European Union’s statistics office in Luxembourg said today. The March reading was the most since the common currency was introduced in 1999.

The yen has fallen 6.7 percent this year, the worst performer among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has risen 2.6 percent and the euro gained 4.1 percent.

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 10.3 percent today.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

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