Dollar Weakens Most in Two Weeks Versus Euro Before Fed

The dollar fell the most in two weeks against the euro on speculation the U.S. economy failed to rebound as much as investors forecast in the second quarter.

The Bloomberg Dollar Spot Index fluctuated before the Federal Reserve begins meetings tomorrow to debate the pace of interest-rate increases and whether to further reduce bond purchases. The Russian ruble weakened for a third day on concern additional sanctions may hinder the economy. New Zealand’s dollar dropped to a six-week low.

“We should expect a rebound in the second quarter, but we don’t think the rebound is going to be as strong as the market expects,” said Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA. “It’s probably going to weigh on the dollar if it disappoints.”

The dollar fell 0.1 percent to $1.3440 per euro as of 5 p.m. New York time, dropping the most on a closing basis since July 14. It touched $1.3422 on July 25, the strongest since Nov. 21. The U.S. currency was little changed at 101.86 yen, while the euro gained 0.1 percent to 136.89 yen.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, was little changed at 1,014.17 from the end of last week, when it rose 0.5 percent, the most since the period ending March 21, and touched 1,014.39, the highest since June 18.

Ruble Sinks

The Brazilian real was the top gainer among the dollar’s 31 major peers, adding 0.3 percent, while the dollars of Australia and Canada added 0.1 percent. The ruble dropped 1 percent, to pace decliners, with South Africa’s rand slipping 0.5 percent.

The ruble dipped as the U.S. and European Union prepared to act on stiffer sanctions against Russia as soon as this week as Vladimir Putin’s government is “doubling down” on its support for Ukrainian rebels, an Obama administration official said. The new sanctions by the EU are aimed at the Russian finance, defense and energy industries as well as Putin’s “cronies,” Deputy National Security Adviser Tony Blinken said.

Russia’s currency fell as much as 1.2 percent to 35.5701 per dollar, the lowest since May 6.

The New Zealand dollar dropped 0.1 percent to 85.47 U.S. cents after tumbling to 85.30 cents, the least since June 12. The kiwi, as the currency is known for the image of the flightless bird on the NZ$1 coin, reached 88.36 cents on July 10, the strongest since the post-float high of 88.43 set in August 2011.

Reserve Bank of New Zealand Governor Graeme Wheeler said on July 24 that the currency’s level is “unjustified and unsustainable,” after signaling a pause following four interest-rate increases this year.

Yuan Gains

China’s yuan rose 0.1 percent to 6.1863 per dollar, a fifth day of gains that’s the longest winning streak since December.

Profit at industrial companies in China rose 17.9 percent from a year earlier in June, more than double the previous month’s 8.9 percent increase, according to official data released yesterday. The Hang Seng China Enterprises Index has climbed 20 percent from a March 20 low, an advance that some traders consider a bull market.

“Funds are getting back into Chinese assets as it looks like the economic slowdown has passed,” said Stella Lee, president of Success Wealth Management Ltd. in Hong Kong. “The yuan is likely to gain further on improved sentiment.”

Economists in a Bloomberg survey predict the U.S. Commerce Department will say on July 30 that gross domestic product rose at a 3 percent annualized rate in the second quarter. The 2.9 percent contraction in the first quarter was the worst reading since the same three months in 2009.

‘Dollar Strength’

A Labor Department report on Aug. 1 will show nonfarm payrolls increased 231,000 in July, according to economists’ forecasts, which would represent a sixth-straight month with 200,000 or more in job gains for the first time since 1997.

The Bloomberg Dollar Spot Index tumbled 0.4 percent on June 18 after Fed Chair Janet Yellen said the central bank plans to keep its interest-rate target low for a “considerable time” after it ends bond-buying. The gauge bottomed at an almost two-month low of 1,002.25 on July 1.

It has since wiped out almost all of that loss amid improved labor-market measures before the Fed announces its next policy decision on July 30.

“We expect dollar strength to unfold,” said Petr Krpata, a foreign-exchange strategist at ING Groep NV in London. “We are going to see divergence in monetary policy. In the U.S. it will be slowly and surely towards eventual rate hikes. We are going to see a rise in short-term U.S. yields and this should bode well for the dollar.”

Going Long

Futures traders increased bullish bets on the dollar versus the euro to the most since November 2012.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the greenback against the shared currency compared to those on a decline -- net longs -- was 88,823 on July 22, compared to 62,846 in the previous week, figures from the Washington-based Commodity Futures Trading Commission show. Net dollar longs versus the yen declined to 53,916, the least since May 20.

“Expectations are we’ll see rebounding growth, but the risks are somewhat tilted to the downside,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “That’s triggering some caution in long-dollar positions.”

The dollar has risen 1.2 percent in the past month, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has gained 0.8 percent while the euro has lost 0.5 percent.

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

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

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