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Dollar Declines Versus Yen Before Federal Reserve Announcement

The dollar declined against the yen before the Federal Reserve holds a policy meeting today amid speculation officials will maintain their pledge to keep borrowing costs at almost a record low.

The 17-nation euro climbed from a two-month low against the greenback after the European bailout fund held its first auction of bills, attracting bids for more than three times the amount of securities that it sold. The 17-nation currency erased earlier losses versus the yen after a German report showed investor confidence unexpectedly increased for the first time in 10 months. Currencies of commodity-exporting countries rose as raw material prices increased.

“We’ve had the post-European Union summit reaction and the market is beginning to turn its eyes to the Fed,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “As far as the euro is concerned, it remains somewhat vulnerable and I’m continuing to watch for its ability to hold its October lows.”

The dollar weakened 0.2 percent to 77.78 yen at 10:18 a.m. New York time. The U.S. currency was little changed at $1.3182 per euro. The shared currency fell 0.2 percent to 102.51 yen.

Stocks, Commodities

The Standard & Poor’s 500 Index climbed 1.1 percent and the Thomson Reuters/Jefferies CRB Index of raw materials rose 1.3 percent as crude oil topped $100 a barrel for the first time since Dec. 8.

The dollar dropped 0.6 percent against the Australian dollar to $1.0135 and weakened 0.9 percent versus the South African rand to 8.2008 as investors sought higher-yielding assets.

Implied volatility for the currencies of the Group of Seven nations dropped to 12.75 percent from a high this year of 15.77 percent, reached Sept. 22, according to a JPMorgan Chase & Co. index.

“There are increased illiquid markets through the year end,” said David Mann, regional head of research for the Americas at Standard Chartered Plc. in New York. “A lot of people that are staying on the sidelines until January.”

The cost for European banks to borrow in dollars rose to the highest in two weeks, according to money-market indicators.

Funding Costs

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 128 basis points below the euro interbank offered rate. It has widened by 19 basis points since Dec. 8, when Europe’s leaders met in Brussels to address the region’s debt crisis.

South Korea’s won slid the most against the dollar among the 16 major currencies tracked by Bloomberg on European debt crisis concern. The won dropped 0.6 percent to 1,153.99 per dollar, the lowest level since Nov. 28.

Fed policy makers will keep their target rate in a range of zero to 0.25 percent at today’s gathering, according to a Bloomberg News survey.

The European Financial Stability Facility sold 1.97 billion euros of 91-day bills at an average yield of 0.222 percent, the Bundesbank said today. The sale was its first fund-raising since European leaders agree on a closer fiscal accord and additional resources to combat the region’s debt crisis at a summit in Brussels last week.

German Economy

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, increased to minus 53.8 from a three-year low of minus 55.2 in November. Economists forecast a drop to minus 55.8, according to a Bloomberg News survey.

The euro earlier reached a two-month low against the yen amid concern European nations will have their credit ratings cut.

It has fallen 1.7 percent in the past month, the most among 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Indexes. The dollar has strengthened 3 percent, the best performance, and the yen has advanced 2.2 percent.

U.S. retail sales rose in November at the slowest pace in five months, indicating faster job growth may be needed to spark the biggest part of the economy.

The 0.2 percent gain in sales followed a 0.6 percent advance in October that was more than initially reported, Commerce Department figures showed today in Washington. Economists projected a 0.6 percent November increase, according to the median forecast in a Bloomberg News survey. Purchases excluding automobiles also rose 0.2 percent.

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