The dollar strengthened to an 11-month high against the yen after the Federal Reserve raised its outlook for U.S. growth, reducing expectations the central bank will begin a third round of bond purchases.
The yen fell for a second day versus the dollar as the extra yield received for holding Treasury two-year notes compared with Japanese debt increased to the most since July. Norway’s krone dropped to a one-month low as policy makers unexpectedly lowered interest rates. Britain’s pound rallied against most of its major peers as gilt yields rose to the highest in four months.
“In the light of things looking better in the U.S., the market wants to hold dollars and short Treasuries,” said Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford Connecticut. “These kind of yield moves would have made the market buy dollar-yen, but on top of that you have clearly divergent central bank policy with aggressive easing in Japan.” A short position is a bet that an asset will decline in value.
The dollar climbed 1 percent to 83.73 yen at 5 p.m. in New York after reaching 83.83, the highest level since April 14. The greenback appreciated 0.4 percent to $1.3032 per euro after climbing to $1.3011, the strongest since Feb. 16. The yen dropped 0.5 percent to 109.12 per euro.
The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, rose 0.4 percent to 80.520. The gauge, which is 57.6 percent weighted to movements in the euro, touched 80.629, the strongest since Jan. 18.
The krone weakened 2.2 percent to 5.8240 per dollar, touching 5.8320, the lowest since Feb. 6. It declined as much as 1.9 percent to 7.5976 versus the euro, lowest since Feb. 10.
The central bank reduced interest rates 0.25 percentage point to 1.5 percent and said the stronger krone was damping growth in Norway, thus inciting the cut. Norges Bank was forecast leave its benchmark rate at 1.75 percent, according to 14 of 16 economists surveyed by Bloomberg.
Norway’s currency fell 1.5 percent today, the worst performer among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rallied 0.9 percent and was the best performer.
Sterling rose against most its major peers. The yield on the two-year bond rose four basis points, or 0.04 percentage points, to 0.51 percent, touching as high as 0.54 percent, the most since November.
The premium in yield investors get for buying the U.K. two-year security versus its U.S. equivalent rose to 12 basis points, from 10 basis points on March 12.
“Euro-sterling is a similar theme to dollar-yen because you had a fairly large move in U.K. yields as people may also be pricing out easing more,” said David Grad, a foreign-exchange strategist at Bank of America Corp. in New York.
South Africa’s rand tumbled as gold, which makes up 12 percent of the nation’s exports, fell to an eight-week low. Gold has surged more than 85 percent since the Fed began monetary stimulus in December 2008. The rand has rallied 24 percent in that time.
The currency fell 2.3 percent to 7.7008 per dollar.
The Federal Open Market Committee said yesterday it expects “moderate economic growth” and predicted the U.S. unemployment rate “will decline gradually.”
The extra yield investors receive from holding two-year Treasuries instead of Japanese debt widened to 28 basis points, the most since July 28, increasing the attractiveness of dollar assets. There is a “relatively high” correlation between the two-year spread and the dollar-yen exchange rate, Bank of Japan Governor Masaaki Shirakawa has said.
“At its core lies the strengthening U.S. economy, all of which looks likely to continue,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “It now seems that risk-on sentiment means dollar strength.”
Yasushi Kinoshita, director-general of the International Bureau at Japan’s Ministry of Finance said today at a conference in Tokyo that the large amount of the nation’s debt held by domestic financial institutions actually makes the Japanese financial system more vulnerable to fiscal shocks than Europe. The nation’s debt-to-gross-domestic-product ratio has risen to 230 percent.
Canada’s dollar strengthened to an eight-month high versus the yen as Japanese investors look offshore for higher returns. Canada’s currency advanced to as much as 84.68 yen, before trading 0.5 percent stronger at 84.35. The so-called loonie was 0.4 percent weaker against the dollar at 99.26 U.S. cents.
Barclays Capital raised its forecast for the dollar against the yen to 90 yen in six months, up from 82, citing Japan’s current-account decline and differences in monetary policy.
The euro may strengthen to 112.80 yen by May, its highest level in more than seven months, based on the Elliott Wave Theory, which says market swings follow a predictable five-stage structure, according to Sumitomo Mitsui Banking Corp.
Implied volatility of three-month options, the expected price swings for the dollar-yen currency pair, climbed to 11.03 percent from 10.85 percent yesterday, data compiled by Bloomberg show.