Yen Weakens on Outlook for Fed to Maintain Stimulus; Pound Drops

The yen fell against all 16 of its major peers as Federal Reserve officials’ statements that the economic recovery isn’t strong enough to start tapering bond-buying boosted speculation that Japan’s currency will be more responsive to the country’s own stimulus efforts.

The Bloomberg U.S. Dollar Index pared a loss versus the greenback after New York Fed President William C. Dudley said the central bank may prolong its asset-purchase program if the economy’s performance fails to meet the Fed’s forecasts. The euro gained earlier against the dollar as economic confidence in the countries that share the currency improved more than economists predicted. The pound dropped as disposable income plunged in the first quarter by the most in 25 years.

“The rebound we’ve seen in risk sentiment has reduced demand for yen safety,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said by phone from Washington. “The case for the Fed to dial down on stimulus isn’t as air-tight as investors thought it was a few days ago.”

The yen dropped 0.6 percent to 98.35 per dollar at 5 p.m. New York time. It fell 0.8 percent to 128.23 per euro. The 17-nation currency added 0.2 percent to $1.3038 after falling yesterday to the weakest since June 3.

The Bloomberg U.S. Dollar Index, which represents 10 major currencies weighted by liquidity and trade flows, fell 0.1 percent to 1,036.05 after declining as much as 0.3 percent.

Market Rankings

The yen has gained 2.1 percent to the greenback this month, while Australia’s dollar has declined 3.1 percent. This quarter, the euro has led all major gainers with a 1.7 percent increase, while the worst-performing Aussie has slipped 11 percent. The greenback is the best-performing currency in 2013 and South Africa’s rand has plunged 15 percent.

The rand gained for the first time in three days as foreigners purchased more South African bonds than they sold, according to data from the Johannesburg Stock Exchange. The currency increased 1.6 percent to 9.9443 per dollar.

India’s rupee advanced the most in two weeks, rebounding from a record low, after a report showed the nation’s current-account deficit narrowed last quarter. It appreciated 0.9 percent to 60.20 per dollar, after rising as much as 1 percent, the biggest increase since June 12.

Sluggish Growth

International Monetary Fund Managing Director Christine Lagarde said earlier that Fed tapering may not be “around the corner.”

“You’ve had a consistent discussion from many world leaders that Fed tapering is not around the corner, and the Fed wants to get that message out as well,” Douglas Borthwick, a managing director and head of foreign exchange at Chapdelaine FX in New York, said in a telephone interview. “The last couple of days have given position takers time for the dust to clear and figure out that the yen will weaken going forward.”

The Bank of Japan is buying more than 7 trillion yen ($71 billion) of bonds a month with hopes of achieving an inflation rate of 2 percent, which yen bears point to as underpinning more weakness.

The euro rallied from a three-week low as the European Commission in Brussels said an index of executive and consumer sentiment rose to 91.3 from 89.5 in May. Economists had forecast a reading of 90.4 for June, based on the median of 32 estimates in a Bloomberg News survey.

‘Powerful’ Strengthening

The broad rally in the dollar will extend as the U.S. economy continues to recover, according to BlackRock Inc.’s Peter Fisher.

“The dollar strengthening looks to be pretty powerful,” Fisher, senior managing director of BlackRock’s Global Executive Committee and a senior director at the BlackRock Investment Institute, said in a television interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “The U.S. economy is recovering.”

The pound dropped to a three-week low versus the dollar as data revisions showed U.K. gross domestic product shrank more than previously estimated from its peak in 2008 to the depths of the recession.

Real household disposable incomes fell 1.7 percent from the previous three months, the most since 1987, the Office for National Statistics said in London today. Gross domestic product rose 0.3 percent in the first quarter of this year, matching a previous estimate, the statistics office said.

The pound fell 0.4 percent to $1.5259 after sliding to the lowest level since June 3.

Options Trading

Trading in over-the-counter foreign-exchange options totaled $27.5 billion, compared with $38.8 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 $6 billion, the largest share of trades at 22 percent. Dollar-yuan options were the second most actively traded, at $5.5 billion, or 20 percent.

Dollar-yen options trading was 44 percent below the average for the past five Thursdays at a similar time in the day, according to Bloomberg analysis. Dollar-yuan options trading was 16 percent above average.

Volatility in currencies surged since the Fed signaled last week it may start reducing stimulus this year. JPMorgan Chase & Co.’s Group of Seven Volatility Index, based on currency-option premiums, reached 11.43 percent after rising to 11.96 percent on June 24, the highest since January 2012.

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