Dollar Rises for Eighth Week Versus Yen as Fed Trims Bond Buying

The dollar rose against the yen for an eighth week, the longest streak since February, after Federal Reserve officials voted to reduce monetary stimulus amid signs that economic growth is gaining momentum.

The U.S. currency gained versus 14 of its 16 major peers after the central bank said it plans to cut its monthly bond purchases to $75 billion from $85 billion, taking its first step in unwinding the unprecedented program. The pound rallied on speculation the Bank of England will need to raise interest rates sooner than planned. Brazil’s real fell after the central bank said it’ll pare intervention that has supported the currency.

“The mechanics of the dollar story are changing -- the normalization of the U.S. growth story is getting attractive for global investors,” Sebastien Galy, a New York-based senior foreign-exchange strategist at Societe Generale SA, said on Bloomberg Radio’s “Bloomberg - The First Word” with Bob Moon. “Investors are moving back their money to the dollar after years of selling the dollar. It’s a systemic shift that’s happening.”

The dollar climbed 0.9 percent to 104.10 yen this week in New York, and reached 104.64, the highest since October 2008. It was the longest period of five-day gains since Feb. 1. The euro fell 0.5 percent to $1.3673, the first drop in six week. Japan’s currency fell 0.3 percent to 142.32 per euro.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose 0.5 percent to 1,021.34. The measure is up 3.5 percent this year.

Future Positions

Hedge funds and other large speculators increased their bets that the yen will decline against the U.S. dollar to almost the highest level since July 2007, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by on a decline in the yen compared with those on a gain -- so-called net shorts -- was 130,223 on Dec. 17, compared with net shorts of 129,711 a week earlier.

The pound was the second best performer among major currencies this week after Norway’s krone as official data showed U.K. unemployment fell to the lowest in almost five years.

“A large drop in the U.K. unemployment data is revitalizing the pound,” Neil Jones, head of European hedge-fund sales at Mizuho Bank Ltd. in London, wrote in a note to clients. “The U.K. will be the first major economy to raise rates. The pound is outperforming and will continue to do so.”

The pound climbed 0.2 percent to $1.6336. It reached $1.6484 on Dec. 18, the highest since August 2011.

Real Intervention

The real, the worst performer, snapped a two-week gain after the central bank said Dec. 18 it’ll reduce an intervention program next year that’s been supporting the currency and limiting import price increases.

Brazil will auction $200 million of foreign-exchange swaps on trading days from January through at least the end of June, down from offerings of $500 million four days a week this year.

The real depreciated 2.4 percent to 2.3874 per dollar.

“I’m really surprised they made this change at this time,” Win Thin, the global head of emerging-market currency strategy at Brown Brothers Harriman & Co. in New York, said of the intervention cutback. “It should have been steady-as-she-goes. Why on earth introduce change when everyone was giving you the benefit of the doubt?”

Baht Drops

Asian currencies retreated this week, led by the Thai baht and Malaysia’s ringgit, after the Fed said it will pare the stimulus that has fueled demand for emerging-market assets.

Global funds pulled $259 million from Thai, Philippine and Vietnamese stocks in the first four days of the week, according to exchange data.

The U.S. central bank acted as a report showed housing starts last month reached a five-year high and the Labor Department reported Dec. 6 the unemployment rate declined to 7 percent in November, the lowest in five years.

The Fed left unchanged its statement that it will probably hold its target interest rate at almost zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent. Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent since 2008.

Fed Policy

At the same time, the central bank reinforced its assurances that it’s a long way from raising borrowing costs, saying that its benchmark rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

Housing starts jumped 22.7 percent to a 1.09 million annualized rate, exceeding all forecasts of economists surveyed by Bloomberg and the most since February 2008, data from the Commerce Department showed Dec. 18. Gross domestic product climbed at a revised 4.1 percent annualized rate, the strongest since the final three months of 2011 and up from a previous estimate of 3.6 percent, a report showed yesterday.

The dollar appreciated 4.1 percent and the euro climbed 8.3 percent this year among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has weakened 15 percent, the largest decline.

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net

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

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