Dollar Rises to 3-Week High Amid Central Bank Divergence Bets

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The dollar rose against the euro and the yen as traders revived bets that the U.S. will tighten monetary policy before central banks in Europe or Japan.

The greenback advanced to its strongest in three weeks against the euro before minutes from the Federal Reserve’s last policy committee meeting that may shed light on the timing of U.S. interest-rate increases. The gains come after the European Central Bank reaffirmed its commitment to quantitative easing. The dollar rallied to a two-month high versus the yen.

“While timing may be in question, the direction of rates here in the U.S. is not,” said Chris Gaffney, president at EverBank World Markets in St. Louis. “That divergence is going to add to strength for the dollar.”

The dollar advanced 0.5 percent to 121.25 yen as of 12:59 p.m. in New York, after touching 121.39, the strongest level since March 18. The U.S. currency gained 0.5 percent to $1.1096 per euro.

The dollar has rallied against all of its major peers this week after a slew of weaker-than-forecast data prompted a two-month selloff that left the currency near its cheapest in four months.

Investors who pared wagers on the currency to the least since September are now weighing whether the time is right to re-establish those bets. The dollar has rallied 16 percent in the past year amid speculation faster growth will spur demand for U.S. assets.

Fed Minutes

Minutes from the Fed’s April 28-29 meeting, which are released at 2 p.m. in Washington, may offer some guidance. In their April statement, policy makers said the economic slowdown in the winter months partly reflected “transitory factors” and they continued to expect the economy to grow at a “moderate pace.”

Should Wednesday’s minutes underwhelm, traders have another chance to gauge central-bank tolerance of a weakening recovery when Chair Janet Yellen speaks in Providence, Rhode Island, on May 22.

“Policy divergence is starting to rear its head again to the benefit of the dollar,” said Joe Manimbo, an analyst at Western Union Business Solutions, a unit of Western Union Co. in Washington. “As long as the minutes keep the door open to a rate hike at any of the coming meetings, that would give the dollar a chance at sustaining its run this week.”

BOJ Meets

The spread 10-year U.S. Treasury yields offer over those in Japan reached 1.91 percentage points Tuesday, the most since Dec. 26, as investors bet on that divergence.

Japan’s central bank starts a two-day policy meeting on Thursday. Economists from Goldman Sachs Group Inc. to Credit Agricole SA delayed their calls on an expansion in the nation’s monetary stimulus, though the largest number still sees a boost by the end of October, a survey by Bloomberg shows.

The euro pared its almost 10 percent rally from mid-March through the middle of this month after ECB Executive Board member Benoit Coeure said Monday the central bank will bring forward some of its monthly bond purchases before liquidity drops this summer. A day later, his colleague Christian Noyer said officials are ready to extend quantitative easing if needed.

“I could see another 15 percent decline in the euro against the dollar going into the end of the year,” taking the pair below parity, said Eric Crittenden, the Phoenix, Arizona-based chief investment officer of Longboard Asset Management LLC, which oversees $300 million of assets. Longboard is “very short” the shared currency, he said.

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