Dollar Gains as Speculation Wanes Fed Will Add Further Stimulus

The dollar advanced against the majority of its most-traded counterparts as speculation receded that the Federal Reserve will increase its monetary stimulus amid stronger-than-forecast economic data.

The euro touched a six-week high this week versus the yen as German Chancellor Angela Merkel’s support for measures to protect the common currency spurred optimism the region’s debt crisis will be contained. The Australian dollar fell against all except two major peers after the government said the central bank could ease monetary policy if currency gains hurt the economy. The Federal Open Market Committee will offer hints of its thinking on a third round of asset purchases, or quantitative easing, when it releases meeting minutes Aug. 22.

“We got excited over three or four positive data surprises” in the U.S., Mary Nicola, a New York-based currency strategist at BNP Paribas SA, said in a telephone interview. “First we were talking about QE, and now we’re talking about scaling back expectations of QE3.”

The dollar declined 0.4 percent this week to $1.2319 per euro. Japan’s currency dropped five consecutive days against the dollar, retreating 1.6 percent to 79.56. The euro gained 2 percent to 98.13 yen after climbing yesterday to 98.41, the most since July 6.

The yen fell against the dollar as yields on Treasuries due in two years touched 0.29 percent on Aug. 16, the highest since July 5.

‘Fairly Dramatically’

“Dollar-yen has stayed lower, longer than you would expect, particularly as yields in the U.S. have risen fairly dramatically,” Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotiabank unit in Toronto, said in a phone interview. “Over the last few sessions, we’re finally seeing dollar yen break out of its range and back towards 80.”

U.S. building permits, a proxy for future home construction, rose to an 812,000 pace, the most since August 2008, Commerce Department figures showed Aug. 16 in Washington. Retail sales rose 0.8 percent, the biggest increase since February, government figures showed Aug. 14.

Confidence among U.S. consumers unexpectedly improved in August, boosting the prospect of stronger household spending this quarter, according to the Thomson Reuters/University of Michigan preliminary index of consumer sentiment. The Conference Board’s index of U.S. leading economic indicators, a gauge of the outlook for the next three to six months, climbed more than forecast in July.

ECB Plan

Merkel, who is due to meet French President Francois Hollande on Aug. 23 and Greek Prime Minister Antonis Samaras a day later, said on Aug. 16 that Germany is “in line” with the European Central Bank’s approach to defending the euro.

“Obviously time is pressing” on stamping out the debt crisis, though “on many of these issues we feel we’re on the right track,” she told reporters in Ottawa at a press conference with Canadian Prime Minister Stephen Harper.

ECB President Draghi offered to buy Italy’s and Spain’s bonds on the market on Aug. 2 as long as the euro governments’ bailout fund makes purchases directly from the two countries’ treasuries and ties them to tough conditions. Spain and Italy have yet to say whether they will request aid.

While “opening the door toward the ECB buying more bonds and sending yields down, it’s good for survival, I think it’s a stretch for a lot of people to believe that even more monetary easing is a good for a currency,” Kit Juckes, the head of foreign-exchange research in London at Societe General SA, said in a telephone interview. “The euro will be a strong currency if and when it survives.”

‘Some Pressure’

The euro gained 0.6 percent over the past week, the best performer alongside the Swiss franc among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen declined 1.5 percent and the dollar gained 0.3 percent.

The euro zone’s current account climbed to a seasonally adjusted 12.7 billion euros ($15.7 billion) in June from 10.3 billion euros the previous month, according to data from the European Central Bank in Frankfurt.

The difference in yields between U.S. and German 10-year bonds yesterday reached its widest point since June 6, at 32 basis points, or 0.32 percentage point. The spread could put downward pressure on the euro by making German debt less attractive, Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview.

“Yields in the U.S. are increasing compared to Germany, which could put some pressure on the euro,” St-Arnaud said.

Nomura forecasts that the euro will fall to $1.18 versus the greenback by the end of the third quarter and $1.15 by year end.

Aussie Falls

Australia’s dollar fell 1.5 percent for the week, the biggest drop since May 18, before the Reserve Bank of Australia next week releases minutes of its Aug. 7 meeting, where policy makers left the key interest rate at 3.5 percent.

Models used by the International Monetary Fund and other analysts show “the Australian dollar is overvalued compared to its medium- to long-run equilibrium value,” according to an Australian Treasury report on its website today.

The Aussie declined as China’s economy showed signs of slowing. Gross domestic product is forecast to increase 8.2 percent this year, a percentage point less than in 2011, according to the median estimate of economists surveyed by Bloomberg.

“There is a sense that the Australian dollar is vulnerable,” Juckes said. “If the Australian economy slowed, it would be vulnerable. If they talk about easing rates further, it would be vulnerable. If the Chinese trade story deteriorates, it’ll be vulnerable.”

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