Dollar Advances to Two-Year High Versus Euro on Outlook for Fed

The dollar rose to a two-year high versus the euro after minutes of the Federal Reserve’s June meeting disappointed speculators who had bet policy makers would signal a need for more monetary stimulus, driving investors to the greenback as a refuge against slower global economic growth.

The U.S. currency extended gains versus the euro and the yen as the minutes, released today, showed “a few” policy makers said the central bank will probably need to take further action to boost the labor market.

“The fact that the minutes weren’t as dovish as many investors had expected has given a boost to the U.S. currency,” said Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. “The fact that officials have kept the door open to more easing steps this year has limited the positive thrust the dollar received.”

The dollar advanced as much as 0.3 percent against the euro to $1.2213, the strongest level since July 2010, before trading at $1.2239 at 5 p.m. New York time, up 0.1 percent. The greenback gained 0.4 percent to 79.76 yen after falling 0.4 percent earlier. The Japanese currency fell 0.3 percent versus the euro to 97.63 after gaining earlier to 97, the strongest since June 4.

Dollar Index

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners touched 83.610, the highest since July 2010, before trading at 83.496, up 0.1 percent.

If the index advances above the 83.54 level, the June 1 high, it will strengthen to as much as 85.32, the 78.6 percent Fibonacci retracement of a two-year decline that began in June 2010, according to MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at Bank of America Corp. in New York. A decline below 83 would suggest the rally was stalling, and a drop to 80.73 would negate it, Curry said in an interview.

The dollar gained 0.2 percent over the past month versus nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes. The euro and the Swiss franc were the biggest losers, each falling 2.2 percent. The Australian dollar rose 3.4 percent, the biggest winner, and New Zealand’s dollar gained 3.1 percent.

Minutes of the Fed’s June 20 meeting show two participants said additional bond purchases are appropriate, while two others said they would be warranted in the absence of “satisfactory progress” in cutting unemployment or if downside risks increase.

‘Risk Off’

“There’s clearly been a risk-off reaction to the minutes,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said in a telephone interview. “The implied observation would be that the market was clearly looking for something more.”

Policy makers at the meeting extended through 2012 the Operation Twist program to lengthen the maturities of assets on the Fed’s balance sheet in a bid to reduce borrowing costs. Chairman Ben S. Bernanke said after the session the Fed is prepared to “take additional steps” if the labor market fails to improve.

U.S. payrolls increased by 80,000 jobs in June, Labor Department data showed last week, trailing a Bloomberg News survey forecast for a gain of 100,000. Private employment, which excludes government agencies, grew 84,000, the weakest in 10 months.

The Fed bought $2.3 trillion of bonds from 2008 to 2011 in two rounds of a tactic called quantitative easing to spur economic growth.

Aussie Dollar

The Australian dollar climbed to a record high against the euro as commodities gained and consumer sentiment in the nation rose to the highest level since February. The Aussie rose versus all of its 16 most-traded peers tracked by Bloomberg. It gained as much as 0.7 percent to A$1.1935 per euro before trading at A$1.1940. The currency rose 0.6 percent to $1.0251.

The Standard & Poor’s GSCI Index of 24 raw materials gained 1.1 percent. An index of Australian consumer sentiment advanced 3.7 percent in July to 99.1, according to a report today from Westpac Banking Corp. and the Melbourne Institute.

The euro “may drift lower” against the Aussie now that it has fallen below the $1.2000 level, Boris Schlossberg, New York-based managing director of foreign exchange at the investment advisory firm BK Asset Management, wrote today in a note to clients.

Canada’s dollar rose 0.3 percent to C$1.0198 amid a rise in crude oil, the nation’s biggest export. Crude for August delivery gained 2.7 percent to $86.15 a barrel in New York.

The Mexican peso gained versus all of its major counterparts except the Aussie, appreciating 0.6 percent to 13.3063 to the U.S. dollar. Oil is Mexico’s second-biggest export.

“The rebound that we’ve seen in oil has been very supportive to these currencies,” Western Union’s Manimbo said.

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