Dollar Index Declines Amid Debate on Fed Direction

The Dollar Index declined for the first time in three days as a survey of the Federal Reserve’s primary dealers said confusion about the central bank’s intentions for its bond-buying program may be hurting the effort’s effectiveness.

The yen climbed the most since February versus the dollar as risk appetite shrank and Japanese stocks slid after a technical signal they had gained too much, too fast. Japan’s currency rose versus all of its 16 most-traded peers as data showed China’s manufacturing contracted this month. The Swiss franc climbed the most against the euro since the central bank imposed a cap in 2011. European Central Bank President Mario Draghi is scheduled to speak in London at 10:30 p.m. local time.

“Certainly to me, the Fed rhetoric has been mixed; it’s been inconsistent,” Eric Stein, a Boston-based portfolio manager at Eaton Vance Management, said in a telephone interview. “Maybe what the Fed is doing now is, they’re getting more volatility now based on Fed commentary and economic data than maybe they’ll get when the actual move is made. Sometimes it’s not the move, but the anticipation of the move.”

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against currencies of six major U.S. trading partners, fell 0.7 percent to 83.744 at 5 p.m. in New York after climbing earlier to 84.498, the highest level since July 2010.

The yen strengthened 1.1 percent to 102.02 per dollar after climbing as much as 2.3 percent, the most since Feb. 25. It slid to 103.74 yesterday, the weakest since October 2008. Japan’s currency rose 0.5 percent to 131.94 per euro. The dollar dropped 0.6 percent to $1.2934 per euro.

Bernanke Testimony

The currency gauge erased gains it made yesterday after Fed Chairman Ben S. Bernanke said in testimony to the Joint Economic Committee of Congress the central bank may taper monthly bond purchases at its next few meetings if it’s confident of sustained gains in the economy. Bernanke also told lawmakers premature tightening of policy may endanger the recovery.

A diversity of Fed speakers expressing different views has left securities dealers unsure of the Federal Open Market Committee’s intentions, according to survey results released today by the Fed Bank of New York and considered at policy makers’ last meeting. Primary dealers trade directly with the U.S. central bank.

“Some dealers noted that the dispersion of views expressed by FOMC participants as to how the FOMC would make decisions regarding the future pace of asset purchases has decreased clarity around the program,” the survey said.

Options Trading

Trading in over-the-counter foreign-exchange options totaled $42 billion, compared with $53 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 was $12 billion, the largest share of trades at 29 percent. Euro-dollar options were the second most-actively traded, at $4 billion, or 10 percent.

Dollar-yen options trading was 49 percent above the average for the past five Thursdays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 11 percent above average.

The yen tumbled as Japan’s Nikkei 225 stock gauge slid 7.3 percent after closing yesterday at the highest since 2007. The index’s 14-day relative strength index climbed yesterday to 82.6, exceeding the 70 level some traders see as a signal an asset has increased too far, too quickly.

Price Action

“It was more so some price action that moved the yen, and the fundamentals that we got after fit into that narrative,” Brian Kim, a foreign-exchange strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. “People are still looking for a weaker yen.”

Yields on Japan’s 10-year government bonds reached 0.996 percent, a 13-month high, before trading at 0.86 percent.

The yen slumped 18 percent in the past six months against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes as Prime Minister Shinzo Abe pledged to beat deflation and the Bank of Japan doubled monthly bond purchases. The euro gained 3.9 percent, and the dollar rose 4 percent.

A gauge of Chinese factory output declined to 49.6 in May from 50.4 the previous month, HSBC Holdings Plc and Markit Economics said today. Readings below 50 indicate contraction.

“There’s been a violent move in the yen today on the back of the drop in stocks,” said Kasper Kirkegaard, a senior currency strategist at Danske Bank A/S in Copenhagen. “People are also starting to question the sustainability of the recent improvement in China. There’s definitely potential for more short-term noise.”

Franc Climbs

The Swiss franc rose as the prospect of a reduction in U.S. monetary stimulus boosted demand for haven assets.

The currency appreciated 0.4 percent to 1.2532 per euro and gained as much as 1.3 percent, the most since Sept. 5, 2011. The Swiss National Bank imposed a cap of 1.20 francs per euro on Sept. 6, 2011, to protect exporters. The franc strengthened 1 percent against the dollar today to 96.88 centimes.

The franc slid to 1.2650 per euro yesterday, the weakest since May 2011, as SNB President Thomas Jordan said a shift of the currency cap was in the SNB’s toolkit.

South Africa’s rand erased losses, snapping a 10-day losing streak that was its longest since June 2008, after the nation’s central bank kept its benchmark interest rate unchanged at 5 percent. The currency gained 0.5 percent to 9.5285 per dollar after falling 1.3 percent to 9.6948, the weakest since 2009.

Australia’s dollar rose 0.5 percent to 97.50 U.S. cents after sliding 1.1 percent to 95.94, the lowest since June 2012.

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