Dollar Rises to 7-Week High on Fed Tapering Bet; Aussie Advances

The dollar rose to a seven-week high after a report showed U.S. manufacturing expanded in August to the fastest pace since June 2011, fueling expectation the Federal Reserve will start cutting bond purchases this month.

The greenback reached a one-month high versus the yen after an Israeli missile test raised concern that conflict in the Middle East was escalating amid the prospect of U.S. intervention in Syria, boosting demand for haven assets. Australia’s dollar rose after the nation’s Reserve Bank held its benchmark rate unchanged. Indonesia’s rupiah slipped to a more-than-four-year low.

“The ISM data was much better than expected, the manufacturing sector continues to expand,” Sireen Harajli, a foreign exchange strategist at Mizuho Bank in New York, said in a telephone interview. “But there’re still a lot of important U.S. data coming out this week. The market is in a wait-and-see mode ahead of the payroll numbers” to determine the Fed’s tapering timing.

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 other major currencies, gained 0.1 percent to 1,036.58 at 5 p.m. in New York, after reaching its strongest level since July 16.

The greenback rose 0.2 percent to 99.57 yen. Japan’s currency added 0.1 percent to 131.14 per euro. The U.S. currency appreciated 0.2 percent to $1.3170 per euro after climbing to the highest level since July 22.

Pound Path

The pound climbed to the strongest level in 15 weeks against the euro as Markit Economics and the Chartered Institute of Purchasing and Supply said a gauge of U.K. construction increased. Sterling gained 0.3 percent to 84.65 pence per euro, after touching the strongest level since May 21. It gained 0.1 percent to $1.5558.

Bank of America’s Merrill Lynch unit said it favors buying the euro against the pound as it may reverse higher to 88.16 pence, MacNeil Curry, New York-based chief rates and currencies technical strategist, wrote in a report today. He cited momentum and reaching the lowest since May.

The Bank of England may be ready to respond to tightening in monetary conditions, while the European Central Bank might strengthen its forward guidance by releasing longer-term inflation projections, limiting euro’s drop against the British currency, according to Citigroup Inc.

The two central banks will announce interest rates decisions on Sept. 5.

Central Banks

“With some negatives in the price of the cross and with the BOE still ready to respond to tightening in monetary conditions, we think that a dip from current levels need not evolve into a downtrend,” Valentin Marinov, the London-based head of Group-of-10 currency strategy at Citigroup, the second-biggest foreign-exchange trader, wrote in a research note today.

Australia’s dollar rose after the nation’s Reserve Bank held its benchmark rate unchanged at 2.5 percent and refrained from signaling further monetary easing. The decision was in line with estimates of all 32 economists in a Bloomberg survey.

The Aussie gained 1 percent to 90.63 U.S. cents after rising to the strongest in almost two weeks. It climbed 1.2 percent to 90.24 yen and touched 90.51, the highest since July 29.

The rupiah weakened beyond 11,000 per dollar for the first time since 2009 on concern Indonesia will struggle to rein in a record current-account gap. The rupiah slid 0.8 percent to 11,065 per dollar, the weakest level since April 2009, prices from local banks compiled by Bloomberg show.

Rupee Weakness

India’s rupee plunged on renewed concern about a credit-rating downgrade. The currency slid 2.6 percent to 67.7300 per dollar after falling 8.1 percent last month, the worst loss since March 1992, and touched an unprecedented 68.8450 on Aug. 28.

The ISM’s manufacturing index increased to 55.7 in August from 55.4 a month earlier, the Tempe, Arizona-based group said today. The median forecast of 85 economists surveyed by Bloomberg called for the measure to rise to 52. Economists’ estimates ranged from 51 to 55.8. Construction spending increased 5.2 percent in the 12 months ending July after adjusting for seasonal variations, according to the Commerce Department figures.

Mexico’s peso depreciated 0.4 percent to 13.3855 per U.S. dollar, the weakest on a closing basis since July 2012, after the U.S. manufacturing data.

The world’s biggest economy will release initial jobless claims data on Sept. 5 and unemployment rate the day after.

Syria Strike

President Barack Obama is seeking congressional approval to strike Syria for what his administration says was a sarin gas attack last month by the government in Damascus. Republican Senators John McCain of Arizona and South Carolina’s Lindsey Graham urged fellow lawmakers to back use of military force, while saying the president has yet to fully explain his strategy. A missile launch detected by Russia’s tracking system was a test, the Israeli Defense Ministry said.

“Dollar strength is definitely a combination of concerns over Syria and expectations of tapering,” Christian Lawrence, a foreign-exchange strategist at Rabobank International in London, said in a telephone interview. “We’re still structurally bullish on the dollar on the back of QE tapering.”

Trading in over-the-counter foreign-exchange options totaled $31 billion, from $9.8 billion yesterday, 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 $6.1 billion, the largest share of trades at 21 percent. Options on Australian-U.S. dollar rate totaled $4.3 billion, or 14 percent.

Dollar-yen options trading was 13 percent less than the average for the past five Mondays at a similar time in the day, and euro-Aussie trading was 1297 percent more, according to Bloomberg analysis.

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