Dollar Rallies Most Since July Versus Euro on Policy Divergence

The dollar rose against the euro for a third week, the longest rally since July, as policy divergence with Europe outweighed conflicting commentary by U.S. officials and jobs data that failed to meet traders’ expectations.

The shared currency fell versus most of its 16 major peers as European Central Bank President Mario Draghi suggested willingness to use bond buying to boost inflation. The U.S. currency gained against Japan’s even as Federal Reserve Bank of St. Louis President James Bullard signaled slowing inflation might prompt policy makers to suspend tapering of debt purchases. A Thomson Reuters/University of Michigan survey on April 11 may show increasing consumer confidence.

“The Fed is continuing to taper and there’s a relatively high hurdle for any deviation from that,” Eric Viloria, a currency strategist at Wells Fargo & Co. in New York, said in a phone interview yesterday. The ECB keeping interest rates on hold “helped to limit some of the euro weakness, even though the comments from Draghi suggest there is a consensus within the ECB that if they do need to take action, they were unanimous on unconventional measures.”

The dollar gained 0.3 percent to $1.3705 per euro this week in New York, touching $1.3673, its strongest level since Feb. 27. It rallied 0.5 percent to 103.29 yen, a third-straight weekly gain and the longest streak since a nine-week rally ending in December. The euro added 0.1 percent to 141.54 yen, for a third weekly advance.

The Bloomberg U.S. Dollar Index was little changed at 1,016.65 after dropping 0.3 percent the previous week. It fell 0.3 percent yesterday, the biggest daily decline since March 6.

BRICS Rise

An equally weighted basket of the so-called BRICS emerging-market currencies, those of Brazil, Russia, India, China and South Africa, rallied for a second week against the dollar and climbed to 96.9, the highest since Oct. 31.

South Korea’s won led gains among major currencies against the dollar, adding 1.5 percent on the week. Brazil’s real rose 1.1 percent and Taiwan’s dollar added 0.8 percent. The Swedish krona led decliners, dropping 0.8 percent, followed by the New Zealand dollar’s 0.7 percent decrease.

Canada’s dollar rallied 1 percent on the week, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar added 0.2 percent, while the euro dropped 0.2 percent and the yen slid 0.3 percent. The krona fell 0.7 to lead decliners.

‘Downward Pressure’

Bank of Japan policy makers meet April 7-8, with all 36 economists surveyed by Bloomberg News predicting officials will keep their policy of targeting an annual increase in the monetary base of 60 trillion yen ($580 billion) to 70 trillion yen. Japan implemented on April 1 an increase in the consumption tax to 8 percent from 5 percent, the first since 1997.

“The forex market is likely to view Japan’s consumption tax hike as JPY negative.” Osamu Takashima, a Citigroup Inc. foreign-exchange strategist in Tokyo, wrote April 3 in an e-mailed note to clients. “The BOJ will have to implement additional monetary easing to limit the tax hike’s impact, and this should increase downward pressure on JPY.”

Futures traders increased their bets that the yen will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- net shorts -- was 88,638 on April 1, compared with 68,887 a week earlier.

Yellen, Bullard

Remarks from Fed policy makers showed signs of dovishness after Fed Chair Janet Yellen sparked a dollar rally last month after she said officials may increase borrowing costs sometime around the middle of next year.

Bullard said April 2 it was “important to defend the inflation target from the low side,” and called a delay in tapering “a clear card we can play.” Yellen said March 31 that “considerable slack” in the labor market is evidence that the central bank’s unprecedented accommodation will still be needed for “some time” to combat unemployment.

“Commentary that we’ve seen from Fed officials has resulted in some fluctuation of expectations of when” borrowing costs may rise, Wells Fargo’s Viloria said. “That’s having an impact on Treasury yields, it’s having an impact on the U.S. dollar.’’”

Fed ’Plan’

The U.S. central bank last month cut its bond buying to $55 billion, from $85 billion last year, citing “underlying strength” in the economy. Yellen said the stimulus program may conclude by year-end and the key interest rate may rise from virtually zero about six months later.

The greenback dropped for the first time in seven days against the yen yesterday as nonfarm payrolls rose 192,000 in March, versus a forecast of 200,000. The payrolls gain last month followed a 197,000 climb in February that was larger than first estimated, the Labor Department reported in Washington.

“The broader concern is the lack of ‘quality’ hires, which is holding down wage growth along with ongoing slack in the labor market,” Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, wrote in a report. “The Fed is expected to stick to its plan to keep rates lower than usual, even once it starts to raise rates in 2015.”

The Thomson Reuters/University of Michigan preliminary reading may increase to 81 after declining to a four-month low of 80 in March, according to the median forecast of 25 economists in a Bloomberg survey.

Draghi said April 3 the Governing Council was “unanimous” in its commitment to exploring new policy avenues, including asset purchases. ‘There was a discussion about QE, it wasn’t neglected,’’ he told reporters in Frankfurt.

Policy makers kept their benchmark interest rate at a record-low of 0.25 percent.

“Any sign the ECB voices concern over the exchange rate and hints at further stimulus is a green light to sell the euro,” Neil Jones, the London-based head of financial institutional sales at Mizuho Bank Ltd., wrote April 3 in an e-mail.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Kenneth Pringle, Greg Storey

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