Yen Weakens Second Day Versus Dollar Before Fed; Real Tumbles

The yen weakened for a second day against the dollar as the Federal Reserve holds a two-day meeting that may provide more information about when U.S. policy makers will start to reduce bond purchases.

Japan’s currency pared its gain this month after the nation’s central bank estimated the current-account balance increased to a record amid unprecedented monetary stimulus. The real touched a four-year low, prompting the Brazilian central bank to intervene for a second straight day as a report showed higher-than-forecast inflation. The Swiss franc advanced versus all of its 16 major peers.

“The Fed has sidelined a lot of investors,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western union Co., said by phone from Washington. “Given the heightened level of uncertainty over the Fed meeting this time around, I think investors are playing it fairly neutral.”

The yen declined 0.9 percent to 95.33 per dollar at 5 p.m. in New York after depreciating 0.2 percent yesterday. The currency has rallied 5.4 percent this month. Japan’s currency weakened 1.1 percent to 127.67 per euro. The euro gained 0.2 percent to $1.3392, rising to the highest level on a closing basis since Feb. 13.

Real Weakens

Brazil’s central bank President Alexandre Tombini said policy makers are working to reduce the inflationary pressure that may stem from a drop in the real, the worst performing major currency in the past month. The real depreciated 0.5 percent to 2.1815 per U.S. dollar.

India’s rupee dropped the most in a week on concern the Fed will signal a reduction in asset purchases that have boosted inflows to emerging markets. The Reserve Bank of India held its repurchase rate at 7.25 percent yesterday. The currency slid 1.6 percent to 58.7725 per dollar.

Trading in over-the-counter foreign-exchange options totaled $26.1 billion, compared with $27.4 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 $4.7 billion, the largest share of trades at 18 percent. Euro-dollar options were the second most actively traded, at $3.6 billion, or 14 percent.

Yen-dollar options trading was 50 percent less than the average for the past five Tuesdays at a similar time in the day. Euro-greenback options trading was 12 percent more than average.

Price Swings

The JPMorgan Global FX Volatility Index increased to 10.46 percent from 10.25 percent yesterday after climbing to a one-year high of 11.43 percent on June 13. The average in the past 12 months is 8.65 percent.

Fed Chairman Ben S. Bernanke will hold a press conference in Washington tomorrow following the central-bank meeting. He said on May 22 the Fed could reduce its monthly purchases of $45 billion of Treasuries and $40 billion of mortgage securities if the employment outlook shows sustained improvement.

Bernanke is “likely to remain vague” about the Fed’s future exit strategy or a tapering of asset purchases, Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney, wrote in a note to clients.

“Market participants are uncertain about the outlook for extraordinary policy support being provided by the Federal Reserve and the Bank of Japan,” Capurso wrote. “Hedgers such as real money managers and corporates may consider taking cover against the risk of heightened volatility.”

Economic Update

Beginning construction of new U.S. homes increased in May and permits to build single-family houses rose to a five-year high, extending a rebound that is helping shore up the expansion. A separate report showed the cost of living in the U.S. rose less than forecast in May, signaling inflation remains under control.

The Bank of Japan estimated its current-account balance, a measure of financial firms’ deposits at the central bank, will rise to a record 75.5 trillion yen.

The yen has fallen 7.5 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-market currencies. The dollar rose 2.8 percent and the euro was the best performer, advancing 4.5 percent.

“The euro is getting a wind to its back thanks to some strength against Japanese cross and some better data on the German investor,” Western Union’s Manimbo said.

The euro reached a four-month high versus the dollar after the ZEW Institute in Mannheim said its index of investor and analyst expectations, which aims to predict German economic developments six months in advance, increased to 38.5 in June from 36.4 the previous month.

German industrial production climbed the most in more than a year and exports increased more than forecast in April, government reports released this month showed.

Franc Gains

The Swiss franc advanced versus most of its major peers after the lower house of parliament voted against further deliberations of a law allowing banks to cooperate with the U.S., making it less likely the bill will pass.

“The deal would presumably result in potential outflow of franc deposits,” Valentin Marinov, head of European Group of 10 currency strategy at Citigroup Inc., wrote in the company’s FX Wire note. “If the deal is not approved in the lower house, this could help the franc regain more ground across the board.”

The Swiss currency strengthened 0.1 percent to 1.2324 per euro and gained 0.3 percent to 92.02 centimes per dollar.

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