Dollar Jumps to Highest Since 2010 as Data Fuel Bets on Tapering

The dollar rallied to its strongest level in almost three years as data signaled the world’s biggest economy is improving, increasing speculation the Federal Reserve will begin slowing its unprecedented monetary stimulus.

The U.S. currency climbed versus all of its 16 most-traded peers this week as U.S. employers added more jobs in June than forecast, unemployment-benefits claims fell and a gauge of manufacturing beat projections. The euro and pound dropped against the dollar after the European Central Bank and the Bank of England said they’ll keep rates at record lows. The Fed is scheduled to release the minutes next week of its last meeting.

“The string of positive economic reports certainly helps to lay the foundation for the Federal Reserve to start considering the near-term tapering of their quantitative-easing program,” Ravi Bharadwaj, a senior market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said yesterday in a telephone interview.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback versus currencies of six major U.S. trade partners including the euro and yen, increased 1.6 percent to 84.449 this week in New York. The gauge touched 84.530 yesterday, the strongest level since July 13, 2010, as it extended a third weekly gain, the longest stretch since March 8.

The greenback climbed 1.4 percent to $1.2829 per euro and reached $1.2806, its strongest level since May 17. The U.S. currency also advanced for a third week against the yen, strengthening 2.1 percent to 101.20 yen. The euro appreciated 0.7 percent to 129.82 yen.

Winners, Losers

The dollar has rallied 8.1 percent this year, the most among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has been the second-best performer, advancing 4.8 percent, while the yen has dropped 8.9 percent in the largest loss.

JPMorgan Chase & Co.’s Group of Seven Volatility Index, based on currency option premiums, touched 11.25 percent July 3, the highest since June 27, holding above its 2013 average of 9.5 percent. It reached 11.96 percent on June 24, the highest since January 2012, after falling to 8.71 on May 1.

South Korea’s won was the best performer this week among the dollar’s 16 most-traded counterparts tracked by Bloomberg, declining less than 0.1 percent versus the U.S. currency. Norway’s krone and the South African rand were the biggest losers, tumbling 2.9 percent and 3.2 percent.

‘Tapering Sooner’

The dollar climbed yesterday after the Labor Department reported U.S. payrolls added 195,000 workers for a second straight month. A Bloomberg survey forecast a 165,000 gain after a previously reported 175,000 rise in May. The jobless rate stayed at 7.6 percent, almost a four-year low.

“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 yesterday. “This suggests tapering sooner rather than later because the cumulative strong momentum is there.”

The Institute for Supply Management’s U.S. manufacturing index rose to 50.9 in June, from 49 in May, versus a Bloomberg survey’s forecast for a rise to 50.5, the group said July 1. The dividing line between expansion and contraction is 50. Initial claims for jobless benefits fell by 5,000 last week to 343,000, the Labor Department reported July 3.

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.

Fed Projections

Bernanke said June 19 after a Fed meeting the central bank may reduce its buying this year and end it in mid-2014 if growth meets policy makers’ estimates. Meeting minutes are due July 10.

Fed officials forecast economic 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.

An interest-rate increase is “far in the future,” Bernanke said last month. The rate has been virtually zero since 2008.

Europe’s 17-nation currency slid versus the dollar after ECB President Mario Draghi made an unprecedented pledge to keep interest rates low for an extended period. The ECB’s monetary policy stance will “remain accommodative” for as long as needed to spur growth, he said July 4 after a policy meeting.

The ECB took the step to provide forward guidance in a more explicit way than it did in the past, Draghi told reporters.

‘Justifiably Lower’

“For a central bank that has been reluctant to offer any kind of pre-committal,” the “characterization of forward guidance is about as much as we can expect from the ECB for now,” said Daragh Maher, a London-based currency strategist at HSBC Holdings Plc. “The euro is justifiably lower on this bias to ease.”

Sterling slid versus all except two major peers, dropping the most since February against the dollar, on bets the Bank of England is ready to do more to aid the U.K. recovery.

The central bank said July 4 market-rate increases aren’t justified and may weigh on growth, fueling bets it will add stimulus. The pound ended the week down 2.1 percent to $1.4890.

The comments from the ECB and BOE, together with stronger data from the U.S., “emphasize that the Fed will be the first of the major central banks to exit unconventional policy,” Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank of Australia, said July 4. “That’s just going to support a further rise in the U.S. dollar.”

The Norwegian krone slid after Statistics Norway said the nation’s manufacturing production declined 2.1 percent in May from the previous month, when it gained a revised 2.9 percent.

The currency tumbled 3 percent to 6.2516 per dollar and touched 6.2654, its weakest level since Sept. 1, 2010.

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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