Dollar Drops From a 4-Month High as Treasury Yields Pare Gains

The dollar declined from a four-month high amid Treasury yields at an almost six-week low before the Federal Reserve meets next week to determine whether to continue scaling back stimulus.

The U.S. currency touched the highest level since September before reports this week that economists said will show manufacturing growth accelerated while existing-home sales rebounded. The Canadian dollar weakened to the least against the greenback since 2009. The yen reached the lowest in a week as the Bank of Japan began a two-day meeting amid speculation it will extend stimulus to counter the impact of a sales-tax increase.

“The 10-year Treasuries coming off some highs are behind the dollar losing some steam from overnight,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc, said in a phone interview. “The dollar is generally following interest-rate markets.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, advanced 0.1 percent to 1,034.16 at 5 p.m. New York time. It touched 1,037.75, the highest since Sept. 6.

The dollar rose 0.1 percent to 104.30 yen after adding 0.6 percent, the biggest increase since Jan. 14. The U.S. currency traded at $1.3561 per euro after adding as much as 0.3 percent. The 18-nation shared currency rose 0.2 percent to 141.43 yen.

Treasury 10-year note yields traded added one basis point, or 0.01 percentage point, to 2.83 after touching 2.87 percent. The yield fell to 2.8157 percent on Jan. 17, the lowest since Dec. 11.

Real, Lira

Brazil’s real decreased versus all but three of 31 major peers amid speculation that accelerating inflation in the nation will spur the central bank to extend borrowing cost increases. The currency slipped 0.7 percent to 2.3606 per dollar after declining 1.1 percent, the most since Jan. 8.

The Turkish lira fell to a record after its central bank left interest rates unchanged, failing to tackle an inflation rate it said will remain above target. The currency plummeted as much as 1.3 percent to 2.2691 per dollar before trading down 0.5 percent at 2.2513.

Thailand’s baht fell as Moody’s Analytics Inc. cut its forecast for the country’s 2014 gross domestic product growth to 3.2 percent from 5.3 percent. The currency depreciated 0.3 percent to 32.915 per dollar after decreasing 0.4 percent.

Loonie Trading

The Canadian dollar weakened to C$1.10 for the first time in more than four years amid signals that the Bank of Canada will continue to provide monetary stimulus as the Fed slows its own. The loonie fell 0.2 percent to C$1.0967 after touching C$1.1019, the lowest since September 2009.

The U.S. dollar-Canadian dollar was the most heavily traded pair today as over-the-counter foreign-exchange options totaled $71 billion, from $39 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 greenback-loonie exchange rate amounted to $15 billion, the largest share of trades at 21 percent. Options on the dollar-yen rate totaled $12 billion, or 17 percent.

U.S. dollar-Canadian dollar options trading was 259 percent more than the average for the past five Tuesdays at a similar time in the day, according to Bloomberg analysis. Greenback-yen options trading was 12 percent above average.

Fed Bets

The dollar gained this year against all but three major currencies before the Fed begins a two-day policy meeting on Jan. 28 at which it may decide to continue tapering stimulus. Policy makers at their previous gathering on Dec. 18 decided to cut monthly bond buying to $75 billion from $85 billion beginning this month.

They will reduce purchases by $10 billion at each meeting to end the program this year, according to economists in a Bloomberg survey conducted Jan. 10.

The Markit Economics preliminary index of U.S. manufacturing climbed to 55 this month from 54.4 in December, according to the median estimate of analysts surveyed by Bloomberg News before the figure is published on Jan. 23. The National Association of Realtors may say on the same day sales of previously-owned homes climbed 1 percent last month after a 4.3 percent drop in November.

‘Strong Enough’

The number of Americans continuing to receive jobless benefits fell to 2.9 million in the period ended Jan. 11 from 3 million, according to the median estimate of economists surveyed by Bloomberg before the Labor Department data on Jan. 23.

“The overall fundamental picture is in favor of the dollar,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “Data suggest the U.S. economy is strong enough for the Fed to gradually reduce the stimulus. The market will continue to watch economic reports closely and any improvement will further fuel speculation in that direction.”

The yen erased earlier losses against the dollar that came after Japan Economy Minister Akira Amari said the country still faced risk of falling back into deflation.

“Amari’s warning that Japan is escaping deflation but that it could return suggests that the Bank of Japan may keep its foot on a monetary pedal,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce. “That puts pressure on the yen.”

Options Trading

Thirty-three percent of economists surveyed by Bloomberg News on Jan. 10-15 expect the BOJ to expand its 7 trillion yen ($67 billion) of monthly bond purchases in the second quarter as it attempts to stoke inflation and revive growth. The sales-tax increase in April to 8 percent from 5 percent will cause the economy to contract 4.1 percent in the three months to June, according to a separate survey.

The yen has climbed 2.2 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar strengthened 1.1 percent and the euro weakened 0.4 percent.

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