Dollar Ends Five-Week Rally as Economy-Fueled Momentum Fades

The dollar halted a five-week rally against the euro that was backed by signals of a strengthening economy, as bullish momentum waned and a report yesterday showed March consumer sentiment trailed forecasts.

The 17-nation currency gained versus the greenback as European political chiefs paved the way for a rescue package for Cyprus, boosting optimism regional debt-crisis issues are being addressed. The pound rose even as Bank of England Governor Mervyn King said in a television interview he sees a case for additional central-bank asset purchases. The Federal Reserve begins a two-day meeting March 19 as inflation below the central bank’s target may provide scope to maintain monetary stimulus.

“The market had gotten pretty darn long on the dollar since mid-January, based on expectation of U.S. outperformance, rather than risk-on sentiment,” Greg Anderson, New York-based head of Group of 10 currency strategy at Citigroup Inc., said in a telephone interview. “We had a little bit of a positioning squeeze and there was a run on those dollar longs.” A long position is a bet that an asset will increase in value.

The dollar depreciated 0.6 percent this week to $1.3067 per euro in New York, touching the weakest level since Dec. 10. The greenback fell 0.8 percent to 95.28 yen. The Japanese currency increased 0.2 percent to 124.58 per euro.

Winners, Losers

The Australian dollar was the biggest winner among the U.S. currency’s 16 most-traded counterparts this week while Brazil’s real dropped the most.

The yen gained versus the majority of its major peers after touching the weakest level against the dollar since August 2009. Prime Minister Shinzo Abe overcame opposition and saw his nominees to lead the Bank of Japan confirmed by lawmakers, paving the way for expended monetary stimulus to pull Japan out of 15 years of deflation.

Japan’s currency has been the worst performer this year among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, depreciating 7.6 percent. The euro gained 1.5 percent, and the dollar increased 2.5 percent.

Futures traders increased 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 93,763 on March 12, up from 73,351 the week before.

Euro Positions

Net-short bets that the euro will fall against the dollar decreased to 24,787 as of March 12, compared with 26,116 a week earlier, CFTC figures showed.

German Chancellor Angela Merkel said Europe must act to support Cyprus as euro-area officials sought to overcome differences on losses for investors and the role of the International Monetary Fund in a bid to end nine months of bailout talks. Merkel said while euro countries won’t provide assistance “under any conditions,” the currency union needed to prevent Cyprus from lurching toward insolvency.

The Thomson Reuters/University of Michigan preliminary U.S. consumer sentiment index for March fell to 71.8, the lowest level since December 2011, from 77.6 in February. The gauge was projected to increase to 78, according to the median estimate of 67 economists surveyed by Bloomberg.

U.S. consumer prices increased 2 percent in the 12 months ended in February, after a 1.6 percent year-over-year gain the prior month, a Labor Department report showed yesterday.

Fed View

“Even as economic indicators improve, I expect the Fed to continue monetary easing and that will weigh on the dollar,” Kengo Suzuki, a currency strategist at Mizuho Securities Co. in Tokyo, said in an interview. “There isn’t inflation concern yet in the U.S.”

Sales at U.S. retailers rose 1.1 percent in February, the most in five months and exceeding all projections in a Bloomberg survey, Commerce Department figures showed on March 13.

“We’re typically getting better dollar data, but we’re not seeing any follow-through,” Jerry Urwin, director of spot foreign-exchange in New York at Barclays Plc, said yesterday in a telephone interview. “This week has been a frustrating week for the market from a fundamentally based positioning point of view.”

The pound rose to a one-week high against the dollar as King said told ITV News March 14 that “markets determine the level of exchange rate, not us.”

Pound Trading

Sterling has tumbled 3.7 percent against the greenback since the start of last month. In that time, minutes of the Bank of England’s February decision showed King and two other policy makers were defeated in a push for more stimulus and Moody’s Investors Service cut the U.K.’s top credit rating.

Australia’s dollar rose against all 16 of its most-traded counterparts as the statistics bureau said on March 14 the number of people employed rose by 71,500 in February from the previous month, when it increased 13,100. That compared with a 10,000 increase estimated by economists in a Bloomberg survey.

The Aussie rose 1.7 percent to $1.0409, after climbing to the strongest level since Feb. 5.

The Mexican peso appreciated versus all but one of its 16 main peers after policy makers led by central-bank Governor Agustin Carstens said on March 11 that a rate cut made on March 8 “doesn’t represent the start of a cycle,” bolstering confidence the bank will keep rates on hold.

The peso increased 1.5 percent to 12.4342 per dollar after reaching its strongest level since September 2011.

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