Dollar Gains as Fed Official Discusses Stimulus-Taper Decision

The dollar rallied against the majority of its most-traded counterparts as Federal Reserve Governor Jeremy Stein said the central bank may make a decision in September about tapering monetary stimulus.

The yen fell to the weakest level versus the dollar since June 6 and 10-year Treasury yields rose as Fed officials sought to clarify policy on providing stimulus to the world’s biggest economy. The euro reversed gains and the International Monetary Fund said the currency made up the smallest share of allocated central-bank reserves since 2004.

Stein’s comments “really got Treasuries moving and got the dollar steam rolling,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview.

The dollar rose 0.8 percent to 99.14 per yen at 5 p.m. in New York. The greenback added 0.2 percent $1.3010 per euro. Japan’s currency weakened 0.6 percent to 128.97 per euro.

U.S. 10-year note yields rose one basis point, or 0.01 percentage point, to 2.49 percent after touching 2.55 percent.

Futures traders for a fourth week decreased bets that the yen will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show.

Futures Positions

The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- so-called net shorts -- was 61,462 on June 25, compared with net shorts of 61,890 a week earlier.

South Africa’s rand has gained 2 percent to the greenback this month, while Australia’s dollar has declined 4.5 percent. This quarter, the euro has led all major gainers with a 1.5 percent increase, while the worst-performing Aussie has slipped 12.3 percent. The greenback is the best-performing currency in 2013 and the rand has plunged 14.2 percent.

India’s currency gained the most in nine months as investors reassessed projections for a reduction in U.S. stimulus. The rupee surged as much as 1.7 percent, the most since Sept. 21, before trading at 59.39 per dollar. That pared its drop this year to 7.4 percent.

The U.S. dollar was 62.2 percent of allocated reserves in the January-March period, compared with 61.2 percent the prior quarter, according to the IMF data. The euro’s share was 23.7 percent, compared with 24.2 percent in the fourth quarter of 2012, it showed.

Reserve Balances

Reserve managers around the world held about $194 billion in Australian and Canadian currencies, according to the first IMF data on the global holdings of the two currencies.

The Australian dollar was 1.63 percent of $6.05 trillion in identified official foreign-exchange reserves in the first quarter and the Canadian currency was 1.57 percent of the total, the IMF data showed.

Australia’s dollar declined 1.5 percent to 91.38 U.S. cents, reaching its weakest level since Sept. 8, 2010. Canada’s dollar fell 0.4 percent to C$1.0519 per U.S. dollar.

The Fed is providing more clarity about how it will wind down its $85 billion in monthly bond buying as unemployment falls toward 7 percent, he said.

The policy-making Federal Open Market Committee should “be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting -- as salient as these releases may appear to be to market participants,” the Fed’s Stein said.

Economic Data

The Thomson Reuters/University of Michigan said its final index of confidence eased to 84.1 this month from 84.5 at the end of May, which was the highest since July 2007. The median forecast in a Bloomberg survey of economists called for 83 in the gauge after a preliminary reading of 82.7. The MNI Chicago Report’s business barometer dropped to 51.6 this month from 58.7 in May, which was the highest in more than a year. The median forecast of 55 economists surveyed by Bloomberg was 55.

The Bloomberg U.S. Dollar Index, which tracks the dollar against 10 major currencies weighted by liquidity and trade flows, gained 0.3 percent to 1,040.48, reaching the highest level on a closing basis since May 28.

Trading in over-the-counter foreign-exchange options totaled $29 billion, compared with $29.9 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 $9.4 billion, the largest share of trades at 33 percent. Euro-dollar options were the second most actively traded, at $2.7 billion, or 9 percent.

Dollar-yen options trading was 1 percent less than the average for the past five Thursdays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 23 percent less than 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 11.02 percent after rising to 11.96 percent on June 24, the highest since January 2012.

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