Dollar Gains on Debt-Ceiling Bets, Fed-Purchase Outlook

The dollar gained to its strongest level in three weeks against the euro on speculation U.S. policy makers will struggle to reach agreement on raising the nation’s debt limit, underpinning demand for the safest assets.

The yen and the greenback rose versus most major peers as minutes of the Federal Reserve’s last meeting showed policy makers said they’ll probably end their $85 billion monthly bond purchases sometime in 2013. Brazil’s real erased early losses on speculation the central bank will allow it to advance more.

“The dollar got a lift out of the latest Fed minutes, which for the first time entertained the notion of the bank scaling back some of its easy monetary policies,” said Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. “The Fed’s low-rate policies have been a leading source of weakness for the greenback.”

The dollar advanced 1 percent to $1.3049 per euro at 5 p.m. New York time and reached $1.3047, the strongest level since Dec. 13. It touched $1.33 yesterday, the weakest since Dec. 19. The yen climbed 1.2 percent to 113.84 per euro. Japan’s currency appreciated 0.1 percent to 87.24 per dollar after declining to 87.36, the weakest since July 2010. It gained as much as 0.7 percent.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, reached the highest level in more than three weeks. It rose as much as 0.8 percent to 80.463 before trading at 80.443.

Fed Minutes

The greenback extended gains versus the euro as minutes released today of the Fed’s Dec. 11-12 meeting showed policy makers divided over whether the latest bond purchases under the central bank’s quantitative-easing stimulus strategy will conclude in mid-2013 or at year-end.

Four years after cutting the benchmark interest rate to virtually zero, policy makers have expanded their third round of quantitative easing to include $40 billion in mortgage bonds and $45 billion in Treasuries. In the first two rounds, the central bank bought $2.3 trillion in securities to fuel economic growth and spur employment.

The yen and dollar gained amid concern the U.S. Treasury will exhaust what it called “extraordinary” measures to keep funding the government by February or March after the nation hit its $16.4 trillion debt ceiling Dec. 31.

“All the way through the first few months of the year, it will be fiscal policy and monetary policy which are at the forefront of people’s minds,” said Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London.

Dollar Outlook

The U.S. currency will advance to $1.19 per euro by year-end, Robson said. That compares with a median projection of $1.27, based on analyst forecasts compiled by Bloomberg.

The implied volatility of three-month options for Group of Seven currencies fell for a second day, touching 7.54 percent, the lowest level since Dec. 21, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark interest rates more attractive as the risk in such trades is that market moves will erase profits. The average in 2012 was 9.23 percent.

Brazil’s real gained as much as 0.6 percent to 2.0334 to the dollar amid bets the central bank will allow further appreciation to help contain inflation. It was little changed at 2.0457 after trimming gains. It weakened 0.2 percent earlier. The currency declined 9 percent in 2012, losing the most against the greenback after an 11 percent drop by the yen.

Rand Drops

South Africa’s rand declined against all of its 16 most-traded peers as U.S. debt-ceiling speculation damped demand for riskier assets. It dropped 1.2 percent to 8.5901 per dollar and reached 8.5974, the lowest level in more than a week.

South Korea’s won rose versus most major peers even amid bets the central bank will cut interest rates as early as next week to slow gains in the currency. It appreciated 0.2 percent to 1,061.65 per dollar and touched 1,061.64, its strongest level since Sept. 2, 2011.

Companies in the U.S. added 215,000 workers in December, up from a revised gain of 148,000 in November, the ADP Research Institute said. The median forecast of 36 economists surveyed by Bloomberg called for an advance of 140,000. Labor Department data tomorrow will show nonfarm payrolls rose by 153,000 workers last month, versus 146,000 in November, another survey showed.

The dollar fell yesterday to a two-week low against the euro after the U.S. Congress passed a bill on Jan. 1 making income-tax cuts started under President George W. Bush permanent for most workers, while reductions in the rates for top earners will expire. That averted $600 billion in immediate tax increases and spending cuts, known as the fiscal cliff, which risked pushing the U.S. economy into a recession.

The International Monetary Fund said in a statement yesterday that “the economic recovery would have been derailed” without the action by the U.S. Congress. The U.S. now needs to raise its debt ceiling “expeditiously,” it said.

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