Dollar Gains as Increase in Retail Sales Boosts Fed-Taper Bets

The dollar gained versus major peers after retail sales rose in July for a fourth month and Federal Reserve Bank of Atlanta President Dennis Lockhart said policy makers may start to slow asset buying as soon as September.

The yen slid the most in nine weeks against the euro after a newspaper report said the Japanese government is weighing a corporate-tax cut. Sweden’s krona strengthened versus the majority its 16 most-active peers after consumer prices unexpectedly increased. The Fed has been buying $85 billion of Treasuries and mortgage debt each month to put downward pressure on borrowing costs, which tends to devalue the dollar.

“Retail sales in the U.S., including revisions, were better than expected -- just on the daily charts, momentum seems to be turning,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York. “There’s a chance the Fed could begin tapering in September.”

The Bloomberg U.S. Dollar Index added 0.5 percent to 1,025.61 at 5 p.m. New York time after rising 0.7 percent, the biggest intraday gain since Aug. 1.

The greenback increased 0.3 percent to $1.3263 per euro. The dollar climbed 1.3 percent to 98.23 yen after gaining 1.5 percent, also the most since Aug. 1. Japan’s currency dropped 1.1 percent to 130.28 per euro after falling 1.2 percent, the biggest drop since June 20.

JPMorgan Chase & Co.’s G-7 Volatility Index rose to 9.4 after touching 9.04 percent yesterday, the lowest intraday level since May 9.

Rupee, Krona

India’s rupee rose versus all 31 of its most-traded counterparts after the government raised taxes on gold imports to contain a record current-account deficit. The currency climbed 0.1 percent to 61.2000 per dollar after earlier gaining 0.5 percent to 60.9713.

The krona gained versus the 17-nation shared currency as consumer prices climbed an annual 0.1 percent in July after declining 0.1 percent the previous month, Statistics Sweden said. The krona appreciated 0.2 percent to 8.6656 per euro and declined 0.1 percent to 6.5344 per dollar.

South Africa’s rand fell after the death of a worker at Lonmin Plc (LMI)’s Marikana mine, almost a year after at least 44 died in violence at the operation. The currency weakened 1.1 percent to 9.9962 per dollar, pushing its year-to-date loss to 15 percent, worst among 16 major currencies tracked by Bloomberg.

Lockhart’s View

“A decision to proceed -- whether it is in September, October, or December -- ought to be thought of as a cautious first step” in tapering, Lockhart, who doesn’t vote on monetary policy this year, said in a speech in Atlanta. He cited an “uneven performance” by the economy.

Fed Chairman Ben S. Bernanke told Congress in July that any reduction in stimulus would depend on the economy’s performance. Half of 54 economists surveyed by Bloomberg last month said the Fed may decide at its Sept. 17-18 policy meeting to reduce the purchases to $65 billion a month.

“The last thing the Fed wants to do is take a bold first step, i.e., a $25 billion cut in purchases, only to have the economy stall and requiring a shift in direction and a step-up in purchases,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a report. “We could see a modest $15 billion cut with the initial focus on Treasury purchases.”

The 0.2 percent U.S. retail sales increase followed a 0.6 percent gain in June that was larger than previously reported, according to Commerce Department figures issued in Washington. The median forecast of 81 economists surveyed by Bloomberg called for a 0.3 percent advance. The measure of demand that feeds into gross domestic product climbed by the most this year.

Japan Tax

Japanese shares rose as Prime Minister Shinzo Abe asked for a study of lower tax rates on businesses as a counterweight to a sales-levy increase, the Nikkei newspaper reported, citing unidentified people in the government. Japan is considering raising the consumption tax by three percentage points next year to rein in a national debt of more than twice gross domestic product.

Options traders have become less bullish on the yen, 25-delta risk reversals show. The premium for one-month options granting the right to buy Japan’s currency versus the euro relative to those allowing for sales was at 0.87 percentage point, the least since May 23, data compiled by Bloomberg show.

Year’s Worst

The yen has tumbled 9 percent this year, the second worst performer after Australia’s dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro advanced 5.2 percent and the U.S. dollar strengthened 4.5 percent.

Trading in over-the-counter foreign-exchange options totaled $27 billion, compared with $30 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the euro-dollar exchange rate amounted to $4.8 billion, the largest share of trades at 18 percent. Options on the dollar-Chinese yuan rate totaled $3.4 billion, or 13 percent.

Euro-dollar options trading was 31 percent more than the average for the past five Tuesdays at a similar time in the day. Dollar-yuan options trading was 44 percent more than average.

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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