Dollar Strength Testing Limits Even as Euro Drops on Greek Woes

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A gauge of the dollar headed for its biggest weekly decline in almost two months amid concern the currency’s strength will persuade the Federal Reserve to push back its first interest-rate increase since 2006.

The greenback weakened against all but two of 16 major peers this week after being unable to sustain a rally Thursday even as a report showed U.S. retail sales increased in May. The euro fell for a second day after Bild reported that Germany’s government is preparing for a Greek default, citing people familiar with the plans.

“The dollar is leading the market, and the moves are being driven by expectations for U.S. rate hikes,” said Kyosuke Suzuki, head of foreign exchange and money market sales at Societe Generale SA in Tokyo. “It’s a fact that investors are extremely wary about the potential for attempts at verbal intervention.”

The Bloomberg Dollar Spot Index, which tracks the greenback’s performance against the currencies of 10 major trading partners, has dropped 1.4 percent this week, the biggest decline since the five days ended April 17. It rose 0.1 percent to 1,175.87 as of 6:45 a.m. in London from Thursday.

The dollar gauge advanced as much as 0.9 percent in New York after the Commerce Department said retail sales rose 1.2 percent in May, the first time this year that the data met projections. The currency index ended the day only 0.2 percent higher.

Disappointing Dollar

“Price action was still rather disappointing for dollar bulls in light of the very strong May retail sales report,” BNP Paribas SA strategists led by Steven Saywell, the global head of foreign-exchange strategy in London, wrote in a report. “With Q2 having been a difficult quarter for many market participants and the FOMC meeting looming next week, there may be some reluctance to rebuild long positions in the dollar.”

Officials at the Federal Open Market Committee are trying to determine whether soft U.S. economic data have been the result of transitory or longer-lasting factors as they prepare for their next meeting on June 16-17.

The U.S. currency has fallen 2.6 percent during the last three months, paring gains over the past year to 18 percent, which is still the best performance among currencies tracked by Bloomberg Correlation-Weighted Indexes.

The dollar pared its weekly loss versus the euro to 1.1 percent. The International Monetary Fund said its team negotiating with Greece has left Brussels after failing to make progress on a deal to help the indebted nation avert default. The euro fell 0.2 percent to $1.1237 from Thursday.

“The odds of a Greek default appear to have increased,” said Greg Gibbs, a strategist at Royal Bank of Scotland Group Plc in Singapore. “While the market has priced in a significant risk of a default over the last six months, it does not appear fully prepared.”

The yen is set for its biggest weekly advance against the dollar in six months after Bank of Japan Governor Haruhiko Kuroda said Wednesday that the nation’s currency was already “very” weak on a real effective basis. The yen has gained 1.8 percent this week to 123.46 per dollar.

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