Dollar Falls Against Euro Amid Fed Stimulus Bets; Franc Weakens

The dollar fell against the euro for a second day as comments from Federal Reserve policy makers fueled speculation Chairman Ben S. Bernanke will tell Congress tomorrow the pace of monetary stimulus should be maintained.

The greenback pared gains versus Japan’s currency after St. Louis Fed President James Bullard said the central bank should keep buying bonds under quantitative easing. New York Fed President William Dudley said policy makers had previously been overly optimistic about economic growth. The yen fell earlier as Japanese Economy Minister Akira Amari backed away from weekend comments that prompted it to rally. The Swiss franc weakened.

“Bullard’s comments add a little bit of a counterweight to some of the relatively hawkish comments we’ve heard of late,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a telephone interview. “It’s prompted a little bit of defensive positioning ahead of Bernanke’s comments tomorrow.”

The dollar depreciated 0.2 percent to $1.2906 per euro at 5 p.m. New York time after gaining 0.3 percent earlier. The yen declined 0.2 percent to 102.50 per dollar after losing as much as 0.6 percent earlier. It jumped 0.9 percent yesterday, the most since April 26. The Japanese currency weakened 0.4 percent to 132.28 to the euro.

Trading in over-the-counter foreign-exchange options totaled $38 billion, compared with $29 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $9 billion, the largest share of trades at 24 percent. Euro-dollar options were the second most-actively traded, at $5.1 billion, or 13 percent.

Above Average

Euro-dollar options trading was 26 percent above the average for the past five Tuesdays at a similar time in the day, according to Bloomberg analysis. Dollar-yen options trading was 22 percent more than the average.

The franc fell against the euro and the dollar after the International Monetary Fund said negative interest rates on banks’ excess deposits could help cool Switzerland’s real-estate market. The currency slid to 1.2529 per euro, the weakest since Jan. 18, before trading at 1.2520, down 0.5 percent. It declined 0.3 percent to 97.01 centimes per dollar.

South Africa’s currency sank versus all of its 16 most-traded counterparts, weakening to a four-year low versus the dollar, as violence at a chrome mine renewed concern that labor disruptions will slow the nation’s economic growth. The rand lost 1.1 percent to 9.5444 per dollar and reached 9.6264, the least since March 2009.

Pound Falls

Sterling dropped versus all its major peers except the rand before the Bank of England releases minutes tomorrow of its May 8-9 meeting, which will reveal how many policy makers voted to boost asset purchases.

The pound also fell as U.K. consumer prices climbed 2.4 percent in April from a year earlier, compared with 2.8 percent in March, the Office for National Statistics said in London.

“This is a negative for sterling because quite clearly weaker inflation opens the door for more monetary stimulus,” said Peter Frank, global head of currency strategy at Banco Bilbao Vizcaya Argentaria SA in London.

The pound lost 0.7 percent to $1.5154 and slid 0.9 percent to 85.17 pence per euro.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against currencies of six major U.S. trading partners, added 0.1 percent to 83.833 after climbing on May 17 to 84.371, the highest since July 2010.

Fed Purchases

The Fed is buying $85 billion a month in Treasury and mortgage debt to push down borrowing costs and spur growth.

The purchases should be maintained because markets indicate they are improving financial conditions and can be adjusted based on how the economy changes, Bullard said today in prepared remarks in Frankfurt. He votes on the policy-setting Federal Open Market Committee this year.

“The comments from Bullard are negative for the dollar,” Eric Viloria, a senior currency strategist at Gain Capital Group LLC in New York, said in a telephone interview. “We thought he would be more aligned with the hawkish side.”

Philadelphia Fed President Charles Plosser called last week for shrinking purchases at the Fed’s next meeting, and San Francisco’s John Williams favored a reduction “perhaps as early as this summer.”

Too Optimistic

New York Fed President Dudley said today he hasn’t decided whether bond buying should be increased or cut. The Fed is waiting for a self-reinforcing economy before it ends stimulus, he said. It was too optimistic about economic prospects in the 2009-2012 period, he said.

“With the benefit of hindsight, we did not provide enough stimulus,” Dudley said.

Bernanke testifies tomorrow to the Joint Economic Committee. The Federal Open Market Committee later in the day will release minutes of its last policy meeting.

Japan’s Amari said he hoped the yen would stabilize at a level that matches the nation’s economic fundamentals. The currency slid yesterday after he said further weakness may hurt “people’s lives.”

“I have previously said that the overly strong yen is in the process of being corrected,” he told reporters in Tokyo. “I will not say it has been corrected, or where it will finish.”

The yen tumbled to 103.31 per dollar on May 17, the weakest level since October 2008.

The yen has tumbled 24 percent in the past 12 months, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar was little changed, while the euro advanced 2 percent.

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