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Dollar Strengthens to 11-Month High on Fed Outlook; Krona Slides

The dollar rose to the strongest in almost a year against the euro amid speculation the Federal Reserve will raise interest rates in 2015, while the European Central Bank signaled additional measures to support growth.

The U.S. currency climbed versus most of its major peers as a Fed measure of the nation’s economy expanded more than forecast last month. The euro slid after ECB President Mario Draghi said inflation expectations have declined, in remarks at a conference in Jackson Hole, Wyoming, where Federal Reserve Chair Janet Yellen said jobs gains may mean the U.S. central bank will raise interest rates sooner than anticipated. Sweden’s krona fell to a two-year low.

“There’s a heavily ingrained view that the dollar should be stronger, against the euro specifically,” Douglas Borthwick, the head of foreign exchange at New York brokerage Chapdelaine & Co., said by phone. “It’s a continuation from what we saw last week with Yellen and Draghi. The market is now convinced that the U.S. will move to raise rates, while the ECB moves to cut rates by some sort of quantitative easing.”

The dollar appreciated 0.4 percent to $1.3192 per euro at 5 p.m. New York time, after touching $1.3184, the strongest level since Sept. 9. The currency has posted six consecutive weekly gains. The greenback gained 0.1 percent to 104.05 yen after reaching 104.49, the highest since Jan. 23. The euro dropped 0.3 percent to 137.27 yen.

Shekel Falls

Israel’s shekel was the biggest loser of the dollar’s 31 major counterparts, slipping 1.1 percent after the nation’s central bank unexpectedly cut interest rates to a record. Pakistan’s rupee fell the most since 2009 before erasing losses as a standoff between Prime Minister Nawaz Sharif and opponents demanding his resignation showed few signs of abating.

The krona declined after the government cut its growth forecast for a second time in two months, citing turmoil abroad. Gross domestic product for the largest Nordic economy will expand 1.9 percent this year, below a July forecast of 2.5 percent, the Finance Ministry said on Aug. 23.

The krona dropped 0.3 percent to 6.9364 per dollar, reaching the weakest level since July 26, 2012.

New Zealand’s dollar fell against all of its 16 major counterparts as analysts predict a report tomorrow will show the nation’s trade balance slipped into deficit last month.

The kiwi dropped 0.8 percent to 83.43 U.S. cents after sliding to the lowest since Feb. 27.

Euro Influence

The euro extended a slide after a survey showed German business confidence dropped for a fourth month, reflecting a faltering euro-area economy that Draghi said might need more monetary stimulus.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, fell to 106.3 in August from 108 in July. Economists predicted a drop to 107, according to the median of estimates in a Bloomberg News survey.

French President Francois Hollande was forced into the third major overhaul of his ministerial team in two years after a dispute on hauling the economy out of stagnation prompted the government’s collapse.

Hedge funds and other large speculators turned the most bearish on the euro in more than two years, according to the Commodity Futures Trading Commission in Washington. The difference in the number of wagers on a decline in Europe’s currency versus those on a gain -- known as net shorts -- rose to 138,825 in the week through Aug. 19, the most since July 2012.

Draghi View

Draghi said investor bets on euro-area inflation “exhibited significant declines at all horizons” in August. Policy makers “will use all the available instruments needed to ensure price stability over the medium term,” he said in a speech at Jackson Hole.

The U.S. economy has made considerable progress and the labor market is healing, Yellen said in her Aug. 22 speech at the conference. Her remarks appeared in line with the message from minutes of the July Federal Open Market Committee meeting, which showed officials growing more aware that labor markets are approaching full employment.

Euro-dollar “certainly feels soft at the moment,” Fabian Eliasson, who works in foreign-exchange sales at Mizuho Financial Group Inc. in New York, said by phone. “Everyone is still looking for clarity and more of an outline of when the first rate hike will be. Some of the numbers have been supportive of an economy that is advancing, but the Fed is still taking a bit of a careful attitude.”

Economic Update

A gauge of economic activity released by the Federal Reserve Bank of Chicago beat analyst estimates, advancing to 0.39 in July, more than the 0.2 forecast, according to a report today. Economists predict data tomorrow will show orders for durable goods in July rose at the fastest pace since March 2011.

The dollar has gained 1.5 percent in the past month, the best-performer after Norway’s krone among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro fell 0.5 percent and the yen declined 0.9 percent.

“The dollar rally that has remained elusive for all of this year is starting to gather some momentum,” Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange Inc. in Washington, said in a phone interview.

To contact the reporter on this story: Rachel Evans in New York at revans43@bloomberg.net

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

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