Dollar Gains After Fed Minutes Show Bond-Purchase Pace May Vary

The dollar gained versus the majority of its 16 most-traded peers after minutes from the Federal Reserve’s last meeting showed several officials favored varying the pace of bond purchases, which debase the currency.

The euro touched its lowest level in six weeks versus the greenback after an industry report showed services and manufacturing in the region shrank at a faster pace in February than economists forecast. The yen appreciated against all but one major counterpart after Finance Minister Taro Aso said the Japanese government won’t buy foreign bonds to end deflation. Automatic spending cuts known as sequestration will take effect March 1 if the U.S. Congress doesn’t act.

“A big reason why the U.S. dollar performed well this week is linked to the Fed minutes, which gave the signal that they could slow the amount of purchases in the near future,” Charles St-Arnaud, a currency strategist in New York at Nomura Holdings Inc., said yesterday in a telephone interview. “It caught a lot of market participants off-guard.”

The dollar appreciated 1.2 percent to $1.3194 per euro this week after touching $1.3145, its strongest level since Jan. 10. The greenback fell 0.1 percent to 93.42. The Japanese currency gained 1.4 percent to 123.22 per euro after appreciating to 122.26, its strongest level since Jan. 29.

Winners, Losers

The pound fell for a second week, with the loss widening late yesterday after Britain lost its top credit rating by Moody’s Investors Service, which cited the continuing weakness in the nation’s growth outlook and the challenges that presents to the government’s fiscal consolidation program.

Sterling fell 2.3 percent to $1.5163 after sliding to $1.5132, the lowest since July 2010.

The Australian dollar was the biggest winner among the most-traded currencies this week, and Norway’s krone dropped the most.

The U.S. dollar appreciated 1.9 percent this year among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 2 percent, and the yen fell 6.2 percent to lead decliners.

Futures traders increased their bets that the yen will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on an increase -- so-called net shorts -- was 65,891 on Feb. 19, compared with net shorts of 61,306 a week earlier.

Net-long bets that the euro will rise against the dollar decreased to 19,103 as of Feb. 19, compared with 24,181 a week earlier, figures showed.

LTRO Repayments

The euro depreciated versus the dollar after the European Central Bank said financial institutions will pay back 61.1 billion euros ($80.5 billion) of the ECB’s second three-year Longer Term Refinancing Operation loans on Feb. 27, the first opportunity for early repayment. That compares with a forecast of 122.5 billion euros in a Bloomberg News survey of economists.

“The market is trading on confidence and sentiment, and the LTRO news shows that tail risk has shrunk less than we thought,” Greg Anderson, New York-based head of Group of 10 currency strategy at Citigroup Inc., said yesterday in a telephone interview. “What we’ve seen this week is the last of the euro longs getting squeezed out.” A long position is a bet that an asset will rise.

The ECB said nine banks will repay next week a further 1.7 billion euros from the first three-year LTRO. That takes the total amount of funds repaid early to 212.3 billion euros, or 21 percent of the overall amount lent. Banks can continue to repay the loans over coming weeks.

Kiwi Drops

The New Zealand dollar slumped the most in almost nine months against the greenback on Feb. 20 after Reserve Bank Governor Graeme Wheeler said the monetary authority was prepared to step in to prevent it from strengthening.

The so-called kiwi has surged more than 40 percent since the end of 2008, the biggest advance after its Australian counterpart among more than 150 currencies tracked by Bloomberg. It climbed to 88.43 U.S. cents on Aug. 1, 2011, the strongest since it was freely floated in 1985.

“From a longer-term investment value-driven perspective, there’s still demand for kiwi,” PK Sinha, New York-based managing director of foreign-exchange at CRT Capital Group LLC, said in a Feb. 20 telephone interview. “It’s not as attractive as it used to be, but it’s still there.”

New Zealand’s dollar depreciated 0.8 percent to 83.82 U.S. cents after falling 83.13, the lowest level in two weeks. The kiwi decreased 0.9 percent to 78.28 yen.

Pending Cuts

The U.S. dollar gained even as federal spending will be reduced by $85 billion in the final seven months of this fiscal year and by $1.2 trillion over the next nine years if Congress doesn’t act on sequestration. By the end of 2013, inaction would lower the gross domestic product by 0.6 percent and cost 750,000 jobs, according to the non-partisan Congressional Budget Office.

The euro slid before Italian voters head for general elections on Sunday amid concern the emergence of a populist government will derail the nation’s austerity program. Caretaker Prime Minister Mario Monti has failed to make headway in opinion polls, even as former premier Silvio Berlusconi and ex-comic Beppe Grillo gained popularity. Pier Luigi Bersani, the union-backed Democratic Party candidate, leads the field.

“Attention next week will be focused on whether we’re able to avoid sequestration here and whether Berlusconi returns to power in Italy,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Either event could have a major impact.”

Federal Reserve Chairman Ben S. Bernanke will make his semi-annual testimony to Congress Feb. 26-27. He is likely to back away from “any perceived hawkishness” emanating from the Fed’s January minutes, Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York, said yesterday in note to clients.

Before it's here, it's on the Bloomberg Terminal.