Dollar Declines as Investors Speculate on Steps by Fed

Dollar Remains Lower Before Bernanke Speaks Amid Stimulus Bets
U.S. retail sales fell for a third month in June, declining 0.5 percent, Commerce Department figures showed yesterday. Photographer: David Paul Morris/Bloomberg

The dollar dropped against all of its 16 most-traded counterparts except the yen as investors speculated the Federal Reserve still may take further steps to spur the nation’s economic recovery.

The U.S. currency rose earlier as Fed Chairman Ben S. Bernanke refrained in congressional testimony from discussing specifics on stimulus, disappointing investors who were betting on signals for a third round of asset purchases by the central bank. The yen fell against all of its major peers as risk appetite rose and stocks rallied. Australia’s dollar climbed.

“Initially the dollar had rallied against all the major currencies as people had adjusted easing expectations because he didn’t mention it,” said Kathy Lien, managing director of foreign exchange at BK Asset Management, an investment advisory firm in New York. “As he continued, people realized Bernanke overall remains pessimistic and didn’t send a clear-cut signal because he wants to buy time. The door is still wide open.”

The dollar fell 0.2 percent to $1.2294 per euro at 5 p.m. New York time after gaining as much as 0.7 percent and weakening 0.4 percent to $1.2317, the lowest since July 10. The greenback appreciated 0.2 percent to 79.06 yen. The Japanese currency fell 0.4 percent to 97.21 per euro.

Europe’s shared currency was within 3 cents of its lifetime average of $1.2087 from Jan. 1, 1999, when it began trading, through yesterday.

The Standard & Poor’s 500 Index gained 0.7 percent after falling 0.6 percent earlier.

Dollar Weakens

The dollar has lost 0.6 percent in the past week, the worst performer versus nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes. Britain’s pound was the best performer, gaining 0.5 percent, while New Zealand’s dollar fell 0.4 percent and the euro slipped 0.1 percent.

Bernanke, in the first of two days testifying before Congress as part of the central bank’s semiannual monetary policy report, repeated the Fed is ready to take further action to boost the economic recovery. Progress on reducing unemployment will probably be “frustratingly slow,” he said.

The euro pared losses as Bernanke, in response to questions, said the central bank’s easing tools include further purchases of assets, including mortgage-backed securities, reducing the interest rate the Fed pays on reserves that banks keep with it and altering communications on the rate outlook.

‘How High’

“Easing is still on the table,” said Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co. “It’s just a matter of how high is the bar for actually implementing it.”

Retail sales unexpectedly fell 0.5 percent in June, the Commerce Department said yesterday, while Labor Department data today showed consumer prices were unchanged last month from May, when they slid 0.3 percent. The data spurred speculation Bernanke would signal new stimulus steps in his testimony.

The Fed bought $2.3 trillion of bonds from 2008 to 2011 in two rounds of a tactic called quantitative easing, seeking to cap borrowing costs and stimulate the economy. Last month, it expanded the program known as Operation Twist that replaces short-term Treasuries in its holdings with longer-term debt.

The yen fell for the first time in four days versus the dollar after Finance Minister Jun Azumi said gains in the currency were “speculative” and officials will “take decisive action if needed.” The yen appreciated to 78.69 per dollar yesterday, the strongest level since June 18.

The yen gained versus the dollar in each of the past three weeks, advancing 1.6 percent versus the dollar from June 22 through July 13.

Volatility Eases

Implied volatility on three-month options for Group-of-Seven currencies fell to 8.9 percent, the lowest on a closing basis since April 27, according to the JPMorgan G7 Volatility Index. Lower volatility makes investments in currencies of nations with higher benchmark interest rates more attractive because the risk in such trades is that market moves will erase profits. The average over the past year is 11.5 percent.

Australia’s dollar rose for a third straight day against the U.S. currency after the nation’s central bank released the minutes of its July 3 policy meeting.

“Consumption was being supported by a favorable labor market,” the central bank said. “With recent signs that the domestic economy had a little more momentum than had earlier been indicated, members saw no need for any further adjustment to the cash rate.”

The Aussie advanced 0.7 percent to $1.0316 and climbed 0.9 percent to 81.56 yen.

Canadian Dollar

The Canadian dollar gained versus a majority of its most-traded counterparts after Bank of Canada policy makers signaled interest-rate increases remain possible even as the nation’s economy cools. They kept the benchmark rate at 1 percent.

Canada’s currency appreciated 0.3 percent to C$1.0120 per U.S. dollar. It rose against 11 of its 16 most-traded peers.

Sweden’s krona climbed against all its major counterparts as central-bank minutes showed “there were differences on how expansionary monetary policy should be.”

The Riksbank held its benchmark interest rate at 1.5 percent this month, after two cuts since December, and signaled it may be prepared to lower rates again as Europe’s debt crisis weighs on growth in the largest Nordic economy.

The krona strengthened 1 percent to 8.5578 per euro and rallied 1.2 percent to 6.9612 per dollar.

“The krona is modestly stronger following the release,” BNP Paribas SA strategists led by Steven Saywell, London-based head of currency strategy for Europe, wrote in a note to clients. “A major policy issue for several members was how the unexpectedly strong development of the Swedish economy should be seen in relation to the increased concern about a weaker development in the euro area. However, we wouldn’t chase euro-krona lower from here.”

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