Yen Drops Versus Dollar on Central-Bank Divergence

The yen weakened for a second day against the dollar amid speculation the Federal Reserve will reduce monetary stimulus while the Bank of Japan maintains its bond-buying program, which tends to debase the currency.

The greenback pared gains versus the euro after U.S. retail sales rose less than forecast. The dollar was the best-performing major currency over the past six months amid bets the Fed will dial back its asset purchases. Australia’s dollar rose against most major peers after growth in China, its top trade partner, matched economists’ estimates in the second quarter.

“The Fed is inching toward less accommodation, and the BOJ is still full-steam ahead on accommodation,” Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said in a telephone interview. “On a day without much news, that will drive the price action.”

The yen sank 0.7 percent to 99.86 per dollar at 5 p.m. New York time, following a 0.3 percent loss on July 12. It appreciated to 98.27 on July 11, the strongest since June 27.

The greenback was little changed at $1.3061 per euro after rising earlier as much as 0.6 percent. The dollar gained 0.2 percent on the final day of last week. The euro strengthened 0.6 percent to 130.46 yen.

Financial markets in Japan were closed today in observance of a national holiday.

Biggest Winner

The U.S. currency has rallied 6.3 percent this year, the most among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has been the second-best performer, advancing 5.2 percent, while the yen has dropped 9.1 percent.

The Brazilian real rallied the most among major emerging markets as Credit Suisse Group AG and Nomura Holdings Inc. forecast the currency will strengthen from an almost four-year low. It gained 2.1 percent,,the biggest increase since June 2012, to 2.2201 per dollar. The real touched 2.2803 on July 10, the weakest level since April 2009.

Mexico’s peso rallied to a one-month high as slower U.S. retail-sales growth eased concern the Fed will end stimulus that has buoyed emerging-market assets. The currency appreciated 1.2 percent to 12.6672 per dollar and touched 12.6558, the strongest intraday level since June 17.

U.S. retail sales rose 0.4 percent in June from May, less than forecast, Commerce Department figures showed today in Washington. A Bloomberg survey called for a 0.8 percent advance.

Risk Appetite

“Below-consensus activity and growth data prove positive for risk appetite by reducing the likelihood of an imminent withdrawal of highly accommodative U.S. monetary policy,” Samarjit Shankar, a Boston-based managing director and senior currency strategist at the Bank of New York Mellon Corp., wrote today in a client note.

The Fed purchases $85 billion of Treasuries and mortgage debt each month as part of its quantitative-easing program to cap borrowing costs. While Bernanke on July 10 damped speculation the central would slow its buying, minutes released the same day of the Fed’s last policy meeting showed “about half” of participants indicated “it likely would be appropriate” to end the purchases late this year.

Bernanke is scheduled to deliver his semi-annual monetary policy report to Congress next week, starting July 17 at the House Financial Services Committee.

BOJ Pledge

Bank of Japan policy makers at a meeting last week stuck with their pledge to expand the monetary base by 60 trillion yen ($605 billion) to 70 trillion yen per year in their effort to stem deflation.

The Bloomberg Dollar Index, which tracks the greenback against 10 other major currencies, was little changed at 1,037.81. It dropped 1.6 percent last week, the biggest slide since June 7.

“Markets will look to buy dips in the dollar,” said Jeremy Stretch, head of currency strategy in London at Canadian Imperial Bank of Commerce, the fifth-most accurate currency forecaster in a Bloomberg Rankings survey for the second quarter. “We will see a weekly squeeze back to the topside as far as dollar-yen is concerned provided we don’t get any nasty surprises from Bernanke.”

The Aussie jumped as much as 0.8 percent to 91.22 U.S. cents before trading at 90.98 cents, up 0.5 percent.

China’s official Xinhua News Agency corrected a report from last week that cited Finance Minister Lou Jiwei as saying the country’s growth target this year is 7 percent, a figure lower than the official goal of 7.5 percent set in March.

China’s gross domestic product grew 7.5 percent in the April-June period, the National Bureau of Statistics said in Beijing today, matching the median estimate of economists in a Bloomberg survey. It expanded 7.7 percent in the first quarter.

Options Trading

Trading in over-the-counter foreign-exchange options totaled $31 billion, compared with $28 billion on July 12, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $9.4 billion, the largest share of trades at 31 percent. Euro-dollar options totaled $2.5 billion, or 8.1 percent.

Dollar-yen options trading was 41 percent higher than the average for the past five Mondays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 21 percent below average.

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