Dollar Falls to Lowest Since October on Lower Yields

The dollar fell against a basket of peers to the lowest level since October as this year’s forecast increase in Treasury yields fails to materialize and reports showed improvement in Spain’s economy.

The euro rallied to a seven-week high versus the dollar on speculation an improving regional economy will deter the European Central Bank from introducing more stimulus at a meeting this week. U.S. yields tumbled last week after an above-forecast gain in April employment failed to damp concern U.S. economic growth remains uneven and the Federal Reserve won’t rush to curtail stimulus. Australia’s dollar strengthened as the Reserve Bank said the job market has improved and New Zealand’s currency climbed for a sixth day.

“The fact that yields didn’t rise after nonfarm payrolls disappointed dollar bulls,” Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA, said in a phone interview. “If you step away from the euro and the yen, it seems like the carry environment is still positive. Markets still like commodity currencies. There’s some sense that the Fed rate hikes are far away in the future.”

The Bloomberg Dollar Spot Index, which monitors the greenback against 10 major counterparts, fell 0.5 percent to 1,002.53, as of 5 p.m. New York time, reaching the lowest level since Oct. 29.

Currency Trade

The euro rose 0.4 percent to $1.3928 after climbing to $1.3951, the highest since March 13. The common currency fell 0.1 percent to 141.62 yen. The dollar depreciated 0.5 percent to 101.68 yen.

Yields on Treasuries due in 10 years fell two basis points, or 0.02 percentage point, to 2.59 percent, after dropping eight basis points last week and reaching the lowest level since February. At the end of last year, the median forecast by economists in a Bloomberg survey called for the yield to increase to 3.1 percent by the end of June.

Australia’s dollar rose the most in four weeks even as the central bank kept the cash rate at a record-low 2.5 percent. RBA Governor Glenn Stevens said in a statement that “there has been some improvement in indicators for the labor market” though it may take some more time for unemployment to decline consistently.

The RBA statement “seems to have a slightly more positive tone, particularly on the labor market,” said Divya Devesh, a Singapore-based foreign-exchange analyst at Standard Chartered Plc. “In the near-term at least, I think the Aussie will remain supported at these levels.”

Australia’s currency advanced 0.8 percent to 93.51 U.S. cents, reaching the biggest gain since April 8.

Kiwi Gain

New Zealand’s dollar strengthened against all of its 16 major counterparts. The unemployment rate slid to 5.8 percent in the January-March period, the lowest since the first quarter of 2009, Statistics New Zealand will say tomorrow, according to the median estimate of economists in a Bloomberg News survey.

The kiwi rose 0.7 percent to 87.41 U.S. cents, touching the highest since August 2011.

The dollar weakened before Federal Reserve Chair Janet Yellen testifies to lawmakers tomorrow.

Yellen said on April 16 that wage increases remain at a historically slow pace with “few signs” of a broad-based acceleration. Futures traders see about a 7 percent chance the Federal Open Market Committee will raise benchmark borrowing costs in December.

Jobs Report

The 288,000 April jobs gain in employment followed a revised 203,000 increase the prior month that was stronger than initially estimated, Labor Department figures showed on May 2. The median forecast in a Bloomberg survey of economists called for a 218,000 advance. Unemployment dropped to 6.3 percent, the least since September 2008, from 6.7 percent as fewer people entered the labor force.

“You look across the board and it is, I think, a dollar-related move and primarily driven by lower U.S. rates,” Robert Sinche, global strategist at Stamford, Connecticut-based brokerage Pierpont Securities LLC, said by phone. “They’re still tag ends of some short covering that went on after the employment number last Friday. Markets that move are markets where there are big positions. I think there were still some big short positions in bonds that have squeezed quite a bit.” A short position is a bet that an asset will decline in value.

Spanish jobless claims fell 111,565 in April, the Labor Ministry in Madrid said, exceeding the median estimate in a Bloomberg News survey for a drop of 51,000. A Purchasing Managers’ Index for services climbed to 56.5 last month, the highest level in seven years, Markit Economics said.

A similar measure of services output in the euro area rose to 53.1 last month, the highest since June 2011, from 52.2 in March. That matched a preliminary reading published April 23.

Pound Up

The pound rose to the highest level against the dollar since August 2009 as a gauge of U.K services output expanded in April more than analysts forecast.

Sterling climbed 0.7 percent to $1.6975, touching the biggest gain since April 8.

The euro gained amid speculation the ECB will announce no new stimulus measure when they meet this week, Valentin Marinov, head of European Group-of-10 currency strategy at Citigroup Inc. wrote in client note today. Policy makers will keep interest rates unchanged at a record-low 0.25 percent when they meet on May 8, according to 56 of the 58 economists surveyed by Bloomberg. The remaining two forecast cuts to 0.15 percent and 0.1 percent.

For the first time since 2008, overnight interbank rates are starting to exceed the ECB’s benchmark interest rate, signaling a return to pre-crisis behavior even as the economy remains fragile. That’s testing the ECB President Mario Draghi’s promise that officials are ready to respond to any unwarranted monetary tightening.

Bond Yields

Italian government bonds rose, pushing 10-year yields below 3 percent for the first time, as euro-area services output increased to the highest since June 2011.

“We see a bit of a break higher in euro-dollar,” Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, said in a phone interview. “There’s a wave of very mild dollar weakness linked to lower yields in the U.S. The break was helped by some better data out of Europe.”

The euro has dropped 0.4 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar weakened 1.9 percent and the yen rose 2 percent. The kiwi is the best performer in the period, climbing 5.2 percent, the indexes show.

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