Dollar Falls as Manufacturing Gauge Trails Forecast; Real Drops

The dollar fell against the euro, reversing an earlier gain, after a report showed manufacturing in the Philadelphia region expanded less than forecast, boosting the chances that U.S. monetary stimulus will be maintained.

A gauge of currency volatility rose to the highest level in almost four weeks. Sterling gained amid bets the U.S. currency will weaken as the Federal Reserve keeps buying bonds to spur economic growth, while Brazil’s real tumbled after policy makers raised interest rates less than forecast. The euro slid yesterday the most since June against the dollar.

“It was another negative surprise, and the market has been reacting quite poorly to these,” Sebastien Galy, a foreign-exchange strategist at Societe Generale SA in New York, said of the factory report. “The key will be to watch the main equity indices to see if we enter what is called a break-out pattern.”

The dollar declined 0.2 percent to $1.3051 per euro at 5 p.m. New York time after losing 0.5 percent earlier and gaining as much as 0.1 percent. The greenback climbed 1.1 percent yesterday, the most on a closing basis since June. The 17-nation currency appreciated 0.2 percent to 128.13 yen after rising 0.7 percent earlier. The dollar was little changed at 98.17 yen after falling 0.5 percent earlier.

The JPMorgan G7 Volatility Index, based on three-month futures options on Group of Seven nations’ currencies, increased to 9.65 percent, the highest since March 22. It has averaged 9.06 percent this year.

The Standard & Poor’s 500 Index declined 0.7 percent to close at a six-week low of 1,541.61. It dropped 1.4 percent yesterday after gaining 1.4 percent on April 16.

Manufacturing Report

Manufacturing in the Philadelphia region expanded in April at a slower pace than projected as fewer orders prompted managers cut back on hiring and inventories. The data follow a report April 15 showing growth also cooled at factories in the New York Fed region.

The Federal Reserve Bank of Philadelphia’s general economic index fell to 1.3 in April from 2 the prior month. Readings greater than zero signal expansion. The median forecast of economists surveyed by Bloomberg called for a gain to 3.

The Fed is buying $85 billion of bonds each month until it sees significant improvement in the labor market. While minutes of the central bank’s March 19-20 meeting said officials debated slowing and ending the purchases, a Labor Department report April 5 showed jobs growth unexpectedly slowed last month to 88,000 workers.

Pound Gains

Sterling appreciated versus its 16 most-traded peers even after the Office for National Statistics said U.K. retail sales including fuel dropped 0.7 percent from February, when they climbed 2.1 percent. Sterling traded as low as $1.5218 before rising 0.3 percent to $1.5279.

“Sterling has held up quite well, and we’re seeing the dollar coming under some pressure,” said Ian Stannard, head of European currency strategy at Morgan Stanley Inc. in London. “The dollar is weakening after the Philly Fed data. Going forward, sterling looks vulnerable, though.”

Hungary’s forint weakened the most in a month against the euro as Hungary’s central bank President Gyorgy Matolcsy signaled further measures to loosen monetary policy to spur growth. The currency depreciated as much as 1.3 percent, the most since March 12, to 298.80 per euro before trading at 298.33, down 1.2 percent.

The forint lost 1 percent to 228.59 per dollar.

Real Weakens

The Brazilian real dropped against all of its major counterparts after the country’s central bank raised benchmark borrowing costs less than some analysts had forecast, spurring speculation the cycle of monetary tightening will be limited. The target lending rate was increased by a quarter-percentage point to 7.5 percent, while 18 of 58 analysts in a Bloomberg survey projected a half-percentage-point increase.

The real declined 0.9 percent to 2.0190 per dollar and touched 2.0222, its weakest level since April 4.

“Over the last couple of days, we’ve been seeing big fluctuations between risk-on grabs for yield and pullbacks,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a phone interview. “Larger trends in positioning and liquidity seem to be moving markets.”

Lagarde Comments

The euro pared an earlier gain after International Monetary Fund Managing Director Christine Lagarde said the currency bloc has the only central bank with enough leeway to take more measures to boost growth as low interest rates fail to trickle down to the region’s economy. The IMF cut its global growth forecast this week and called for “aggressive” monetary policy in the region, which is set to contract for a second year.

Europe’s shared currency rose 1.1 percent over the past month versus nine developed-nation peers monitored by Bloomberg Correlation-Weighted Indexes. The dollar fell 0.4 percent, while the yen decreased 3.8 percent.

The euro’s move up toward $1.3226 has prompted selling, leaving the shared currency vulnerable to a drop to $1.2962, Cilline Bain, a London-based technical analyst at Credit Suisse Group AG, wrote in a client note. A decline beyond that level would expose the euro to a move to $1.2746, which would be its weakest level in two weeks.

The yen declined earlier versus the dollar as a draft statement prepared for a meeting of Group of 20 nations officials suggested members will withhold direct criticism of Japan’s efforts to weaken the currency and end 15 years of deflation. G-20 nations will affirm a commitment to avoid debasing their currencies to gain a trade advantage, according to the statement.

The G-20 talks will be the first since the Bank of Japan announced record monetary easing. The BOJ plans to purchase 7.5 trillion yen ($76 billion) of bonds a month and double the monetary base in two years, the central bank said April 4.