The dollar climbed versus a majority of its major peers with growth in the U.S. forecast to outpace Europe and Japan, and on speculation the worst slump against the yen in 15 months yesterday was overdone.
The Australian dollar and Brazilian real declined the most against the greenback after Federal Reserve Bank of St. Louis President James Bullard said U.S. economic fundamentals remain strong, sending bond yields higher. The euro fell as concern increased that a financial crisis is returning to the region’s so-called peripheral nations.
“U.S. Treasuries yields are higher, that’s a sign of overshooting earlier and we’re getting back to an orderly market,” said Masafumi Takada, a New York-based director at BNP Paribas SA. “Dollar-yen should come back up.”
The dollar rose 0.4 percent to 106.33 yen at 5 p.m. New York time, after falling as much as 1.7 percent yesterday, the steepest loss since July 2013. It gained 0.2 percent against the euro to $1.2809 per euro, while the 18-nation currency climbed 0.2 percent to 136.20 yen.
JPMorgan Chase & Co.’s Global FX Volatility Index increased to as much as 8.56 percent, the highest since Feb. 6. The measure has increased from 5.28 percent in July, the lowest on record.
Speculation the U.S. central bank will raise rates next year had led to a record rally in the U.S. currency. The advance started to reverse last week after minutes of the Sept. 16-17 Federal Open Market Committee meeting showed participants said expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated.”
The currency plunged yesterday as a bigger-than-forecast drop in retail sales prompted traders to push back bets the Fed will raise interest rates until the end of next year.
“The data that sparked the move was weaker than expected but overall data-wise, and as far as the growth outlook is concerned, the U.S. looks more favorable than elsewhere,” Ian Stannard, the London-based head of European foreign-exchange strategy at Morgan Stanley said, referring to the decline in the dollar yesterday. Morgan Stanley predicts the U.S. currency will appreciate to $1.24 per euro by the end of this year.
The U.S. economy will expand 2.2 percent this year and 3 percent in 2015, according to Bloomberg News surveys. The euro area will grow 0.8 percent and 1.3 percent, while Japan’s will expand 1 percent in 2014 and 1.2 percent the following year, the surveys predict.
Bond markets in the so-called European peripheral nations slumped as euro-area finance ministers clashed with Greece’s leaders over their plan to leave its bailout, sparking concern that the nation won’t be able to finance itself at sustainable rates without the support of its regional partners.
Greece’s 10-year yield jumped 111 basis points, or 1.11 percentage point, to 8.96 percent after rising 85 basis points yesterday. Spain’s 10-year yield climbed six basis points to 2.17 percent. Even France wasn’t immune to the selloff, with that nation’s 10-year yield increasing 12 basis points to 1.26 percent.
“Periphery bond yields have really exploded,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “The worse that situation gets the more likely it is that the ECB has to do some more aggressive form of QE,” he said, referring to government bond purchases, or quantitative easing.
European Central Bank President Mario Draghi in Washington said on Oct. 11 that the central bank will use further unconventional monetary policy instruments if needed to support a recovery. The ECB has already implemented a negative deposit rate, offered cheap loans to banks and unveiled a plan to buy asset-backed securities.
“It’s partly down to liquidation of overseas investors in euro-zone peripheral assets,” Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London said, referring to the euro’s decline. “They are selling the euro out and repatriating.”
In a twice-yearly report to Congress on foreign exchange, the U.S. Treasury Department said changes to China’s currency policy remain incomplete and the Asian nation should allow the market to play a greater role in setting the yuan’s value. The report covering the first half of this year concluded that no country was designated a currency manipulator.
The Chinese currency “remains significantly undervalued,” it said. The People’s Bank of China increased its daily reference rate by 0.1 percent to 6.1395 per dollar today, the highest since March 19.
“The lack of criticism from the U.S. may actually please China, which is happy to let the yuan gain a bit more,” said Daniel Chan, an analyst at Brilliant & Bright Investment Consultancy Ltd. in Hong Kong.
The yuan climbed 0.05 percent to 6.1231 per dollar, China Foreign Exchange Trade System prices show. It appreciated to 6.1209 earlier today, the strongest level since March 7.