The dollar rose for the first time in three weeks versus the euro as the Federal Reserve refrained from additional asset buying while extending its maturity-extension plan, trimming bets on debasing the U.S. currency.
The euro depreciated against the greenback as German Chancellor Angela Merkel opposed direct bailout funding to address the bloc’s debt crisis, which played a role in the U.S. central bank lowering its economic-growth forecast. The yen weakened versus all of its 16 most-traded counterparts amid speculation monetary stimulus may be expanded to bolster the economy. European Union leaders will meet in Brussels on June 28-29, the 19th summit since Greece’s financial meltdown rattled the euro.
“The growth data has been pretty soft and the Fed’s forecast was more pessimistic than anticipated,” Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York, said in a telephone interview. “The dollar is tending to benefit from less of a risk bounce than anticipated.”
The dollar added 0.5 percent this week to $1.2570 per euro in New York. The shared currency rose 1.6 percent to 101.10 yen, touching its highest point since May 22. Japan’s currency fell 2.2 percent to 80.43 per dollar, reaching the weakest level since May 2.
Futures traders decreased their bets that the euro 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 euro compared with those on a gain -- so-called net shorts -- was 141,066 contracts on June 19, compared with net shorts of 195,187 a week earlier. They reached a record of 214,418 the week ended June 5.
The British pound was the second-biggest loser against the greenback this week, declining 0.8 percent to $1.558. The South Korean won was the biggest winner against the U.S. currency, appreciating 0.8 percent to 1,157.05 per dollar.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, added 0.7 percent to 82.212 this week, its biggest weekly increase since May 25.
The yen weakened on speculation the Bank of Japan may expand monetary stimulus, a decision that would debase the currency. Japan’s parliament approved on June 21 the government’s nominees to the BOJ’s board, confirming two economists who have signaled support for monetary stimulus.
“Expectations for further monetary easing by the BOJ are increasing,” Neil Jones, head of hedge-fund sales at Mizuho Corporate Bank in London, said in a telephone interview. “Markets expect the proposed consumption tax hike to pass through parliament by the end of the month. Tighter fiscal policy raises the chances of a looser monetary policy. On both counts, a currency should weaken, and the yen is no exception.”
Japanese Finance Minister Jun Azumi pledged on June 1 to take “decisive action” to protect against “excessive moves” after the yen climbed to its highest level since February against the dollar.
The difference between yields on Japanese and U.S. two-year government securities has widened since June 4 and reached its highest level since April 5. U.S. two-year yields exceed Japan’s similar maturity debt by 20 basis points, or 0.2 percentage point.
The U.S. central bank said it will expand its so-called Operation Twist program, which seeks to lower borrowing costs by extending the average maturity of the securities in the central bank’s portfolio, by $267 billion through the end of the year. Officials also cut their estimates for 2012 growth after last month’s slowdown in hiring and said there will be little progress on unemployment during the rest of the year.
“They’re keeping a bullet in the chamber in case things blow up in Europe, which is a very prudent way of handling debt and uncertainty,” said Greg Anderson, a currency strategist at Citigroup Inc. in New York. “If the Fed had used its last bullet in QE3, that would be worrying for the market,” he said referring to the Fed’s asset purchases, known as quantitative easing, or QE.
The Fed bought $2.3 trillion of assets in two rounds of stimulus known as quantitative easing between December 2008 and June 2011. The Dollar Index lost 14 percent during that period.
The central bank has also kept its benchmark interest rate at zero to 0.25 percent since December 2008.
Germany’s Merkel cast doubt on direct sovereign debt buys, trimming speculation that Greece’s new government signaled progress to contain the bloc’s financial crisis. Merkel caused the euro to retreat briefly yesterday after saying Spain is responsible for its own banks and that direct bailout funding of banks violates treaties.
Spanish policy makers considered forcing investors who hold equity and junior debt in banks to absorb losses in a restructuring, according to a person with knowledge of the plan.
The euro fell the most in five months against the dollar June 21 as Moody’s Investors Service lowered credit ratings on 15 global banks, adding to concern Europe’s debt crisis is worsening. Moody’s suffered a downgrade of its own yesterday as markets responded to the company’s rating cuts by bidding up the value of their stocks and bonds.
The euro will strengthen to $1.25 by year end, while the yen will appreciate to 82 U.S. cents, according to average analyst estimates in a Bloomberg News survey. The Dollar Index will close the year at 82.7, according to the survey.