Dollar Falls as Rising Jobless Claims Spur Stimulus Bets

The dollar fell to the weakest level against the euro in seven weeks as jobless claims rose to a one-month high, increasing speculation that the Federal Reserve will seek to stimulate economic growth.

The greenback declined earlier against the majority of its most-traded counterparts as Fed and China officials signaled they were prepared to ease monetary policy to expand economic growth. Europe’s shared currency pared gains after German Chancellor Angela Merkel said “it’s important to me that we all stand by our obligations” as Germany and France held debt-crisis talks in Berlin. Australia’s dollar fell after a report indicated manufacturing will contract at a faster pace in China, its largest trading partner.

“It certainly isn’t the direction we want to be headed in, with jobless claims moving higher,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said in a telephone interview, pointing to the August payrolls report due Sept. 7 as key to Fed thinking. “If the data continues to show improvement, then that could reduce the likelihood of additional stimulus.”

The U.S. currency fell 0.3 percent to $1.2564 per euro at 5 p.m. New York time, after reaching $1.2590, the least since July 4. It declined 0.1 percent to 78.49 yen. The euro was 0.2 percent stronger at 98.62 yen.

Jobless claims rose by 4,000 for a second week to reach 372,000 in the period ended Aug. 18, Labor Department figures showed today in Washington. The median forecast of 41 economists surveyed by Bloomberg called for 365,000.

Employers added 163,000 workers last month, the biggest gain since February, according to the Labor Department jobs report issued earlier this month. The figures showed the jobless rate climbed to a five-month high of 8.3 percent.

Euro Rally

Minutes of the U.S. central bank’s latest policy meeting released yesterday showed officials remain supportive of a third round of asset purchases under quantitative easing, or QE, as unemployment has been mired at more than 8 percent since 2009.

“It’s the hope for more progress in Europe and the adjustment in monetary policy expectations from the Fed that is fueling the rally in the euro,” Kathy Lien, managing director of foreign exchange at BK Asset Management, an investment advisory firm in New York, wrote in a research note. The increase in jobless claims and smaller rise in new home sales come “at a terrible time for the U.S. dollar, because investors are already readjusting their QE3 expectations.”

Short euro positions, or bets the currency will fall against the dollar, have climbed, according to Commodity Futures Trading Commission data. Futures traders increased their speculative euro short positions to 137,810 contracts on Aug. 14, compared with 131,711 the prior week.

‘More Aggressive’

There’s a 50 percent chance that the Fed will announce a form of quantitative easing at their September meeting, and it’s increasingly likely for the central bank to ease further later in 2012 or next year, Rick Rieder, chief investment officer of fundamental fixed-income at New York-based BlackRock Inc., the world’s largest money manager, said in an interview with Deirdre Bolton on Bloomberg Television’s “In The Loop.”

“Employment is going to take a very long time to get to the Fed’s mandate of full employment, which means they’re going to be on hold for a long time,” Rieder said. “Their comments yesterday were more aggressive than I think people would have thought.”

Chairman Ben S. Bernanke will have an opportunity to clarify his views in an Aug. 31 speech at a forum for central bankers in Jackson Hole, Wyoming, where he signaled a second round of bond buying by the Fed in 2010. Fed officials next meet on Sept. 12-13.

‘Provide Confidence’

The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt between 2008 and 2011 in two rounds of quantitative easing to cap borrowing costs. Policy makers have held the Fed’s key rate in a range of zero to 0.25 percent

A third round of asset purchases would “provide confidence to markets that we are intending to be accommodative for quite some time,” Chicago Fed President Charles Evans told reporters in Beijing today. More accommodative policies are needed around the world, from China to the U.S., he said.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six U.S. trading partners, dropped as much as 0.3 percent today to 81.221, the lowest since June 20.

Home Sales

The greenback remained lower even after a separate report showed purchases of new U.S. homes climbed 3.6 percent to a 372,000 annual pace, following a 359,000 rate in June that was higher than previously estimated. The median estimate of 72 economists surveyed by Bloomberg called for a rise to 365,000. The rate was the same in May, which was the strongest since April 2010.

The dollar has fallen 3.4 percent in the past month, the second-worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen posted the biggest decline, dropping 3.8 percent, while the euro climbed 1.1 percent.

The greenback is likely to gain against its biggest counterparts over the longer term as central banks in Europe, Japan and the U.K. also commit to loose monetary policy, UBS AG currency strategists said today in a research note.

The firm raised its forecast for the euro to $1.25 from $1.20 in the next month and kept its call for the yen against the dollar unchanged at 78 yen during that period. The euro will decline to $1.15 in the next year “as austerity in Europe leads to prolonged loose monetary policies,” UBS said.

Merkel, Hollande

Merkel told reporters before talks with French President Francois Hollande she expects Greece to fulfill the terms of its bailout and is waiting for the next report by international inspectors.

“We and I will encourage Greece to pursue the path of reform that demands a lot from the people,” said Merkel, adding she would convey that message to Greek Prime Minister Antonis Samaras when she hosts him for talks in Berlin tomorrow.

People’s Bank of China Governor Zhou Xiaochuan said yesterday that adjustments to interest rates and banks’ reserve requirements are still possible after the central bank stepped up temporary cash injections this month.

The preliminary reading of 47.8 for a China purchasing managers’ index released by HSBC Holdings Plc and Markit Economics, called the flash PMI, compares with a final 49.3 for July. A number below 50 indicates contraction. If confirmed, it would be the weakest level since November and extend to 10 months the longest run of readings below the expansion-contraction dividing line of 50 in the index’s eight-year history.

Aussie, Real

Australia’s dollar weakened against 14 of its 16 major peers. The so-called Aussie fell 0.6 percent to $1.0441, snapping three days of gains.

“Aussie this morning was pretty vulnerable on the back of the Chinese PMI data,” Mary Nicola, a New York-based currency strategist at BNP Paribas SA, said in a telephone interview “We’ve remained pretty bullish on Aussie because we do expect quantitative easing and we do expect policy stimulus from China.”

Brazil’s real declined against the greenback as speculation the central bank will intervene further to weaken the currency outweighed bets policy makers will add stimulus to bolster the global economy.

The real depreciated 0.4 percent to 2.0238 per dollar and was poised for a weekly loss of 0.3 percent.

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