Dollar Climbs to Three-Year High After Jobs Gains; Pound Weakens

The Dollar Index climbed to the highest level since 2010 after U.S. employers added more jobs than forecast in June, fueling bets the Federal Reserve will begin slowing unprecedented monetary stimulus.

The gauge, which IntercontinentalExchange Inc. (ICE) uses to track the greenback versus six U.S. trade partners’ currencies, has gained 4.8 percent since June 18, the day before Fed Chairman Ben S. Bernanke said the central bank may begin cutting bond buying this year if growth continues. Today’s data gave him reason to maintain his timetable. The pound slid on wagers the Bank of England is ready to do more to aid the U.K. recovery.

“These are really strong numbers, and there was an expected strong-dollar response across the board,” Dan Dorrow, head of research at Faros Trading LLC in Stamford, Connecticut, said of the U.S. data in a telephone interview. “This suggests tapering sooner rather than later because the cumulative strong momentum is there.”

The Dollar Index advanced 1.5 percent to 84.448 at 5 p.m. in New York. It jumped as much as 1.6 percent, the biggest intraday gain since November 2011, to 84.530, the highest level since July 13, 2010. The gauge rose 1.6 percent over the past five days in its third weekly increase, the longest winning stretch since March.

The dollar appreciated 0.7 percent to $1.2829 per euro and touched $1.2806, its strongest level since May 17. The greenback rose 1.2 percent to 101.20 yen and reached 101.23, the highest since May 31. The Japanese currency declined 0.5 percent to 129.82 per euro.

ECB, England

The 17-nation currency fell yesterday versus the greenback as European Central Bank President Mario Draghi pledged to keep rates at a record-low 0.5 percent for an extended period.

Sterling slid to the lowest since March against the dollar after the Bank of England, led by newly installed Governor Mark Carney, signaled yesterday policy makers will keep rates at a record low for longer than investors had anticipated.

“ He wanted to draw attention to the fact that the recovery is very nascent, very fragile,” said Jane Foley, a senior currency strategist at Rabobank International in London. “That leaves the pound weaker.”

The U.K. currency slid 1.2 percent to $1.4890 and reached $1.4858, the lowest level since March 12. The pound lost 0.6 percent to 86.18 pence per euro after touching 86.33 yesterday, the weakest since April 17.

‘Stronger Dollar’

There’s “a stronger dollar ahead, but not U.S.-growth friendly,” as the ECB and BOE ease while Fed tapering looms, Bill Gross, manager of the world’s biggest fixed-income fund at Pacific Investment Management Co., wrote in a Twitter post.

The krone dropped for the first time in three days against the dollar after Statistics Norway said the nation’s manufacturing production declined 2.1 percent in May. The Norwegian currency tumbled 2.3 percent to 6.2516 against the dollar and touched 6.2654, the weakest since September 2010.

The dollar has strengthened 8.1 percent this year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has tumbled 8.9 percent, while the euro has advanced 4.8 percent.

Trading in over-the-counter foreign-exchange options totaled $28 billion, compared with $18 billion yesterday and $33 billion on July 3, 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 $5.9 billion, the largest share of trades at 21.2 percent. Euro-dollar options totaled $5.5 billion, or 19.7 percent.

U.S. financial markets were closed yesterday for the Independence Day holiday.

Below Average

Dollar-yen options trading was 38 percent below the average for the past five Fridays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 93 percent above average.

U.S. payrolls rose by 195,000 workers for a second straight month, the Labor Department reported today in Washington. The median forecast in a Bloomberg survey projected a 165,000 gain after a previously reported 175,000 increase in May. The jobless rate stayed at 7.6 percent, almost a four-year low.

“Coming into today, our call for a December first-taper was already probably a little underwater, and after today’s report we are moving to a call for a first reduction in asset purchases at the September FOMC meeting,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a client note, referring to the policy-setting Federal Open Market Committee.

Fed Purchases

The Fed is buying $85 billion of Treasuries and mortgage bonds each month to put downward pressure on borrowing costs in the third round of its quantitative-easing stimulus program. It purchased $2.3 trillion of assets from 2008 to 2011 in the first two rounds. The purchases tend to debase the currency.

Bernanke said June 19 after an FOMC meeting the Fed may reduce the buying this year and end it in mid-2014 if growth meets policy makers’ estimates. Fed officials forecast expansion of as much as 2.6 percent this year and 3.5 percent in 2014. A plurality of economists in a June 19-20 Bloomberg survey said the central bank will slow purchases at its Sept. 17-18 meeting.

Policy makers have also kept the key interest-rate target at zero to 0.25 percent since 2008 to support the economy.

The probability of a rate increase of at least a quarter-percentage point by the Fed’s December 2014 meeting rose to 57 percent, from 39 percent on June 5, according to fed-funds futures data compiled by Bloomberg.

Bernanke said June 19 a rate increase is “far in the future.” The Fed has said it will keep the rate at almost zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Jeff Marshall in New York at jmarshall75@bloomberg.net

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

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