Dollar Gains Versus Most Peers on Stimulus Outlook; Aussie Drops

The dollar strengthened against most major peers as investors bet the Federal Reserve will withdraw monetary stimulus faster than the European Central Bank.

The greenback pared a weekly loss versus the euro as Philadelphia Fed President Charles Plosser said the central bank should start slowing monthly asset purchases under quantitative easing in September. The currency fell for the past two days after Fed Chairman Ben S. Bernanke signaled the bond buying won’t be dialed back soon. The euro weakened as Fitch Ratings downgraded France and Portugal struggled with political turmoil. Australia’s dollar slid to an almost three-year low.

“Expectation is still that tapering is on the table before the end of the year,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “Everyone will be looking at every special detail, like where growth is coming from and signs of labor-market improvement.”

The dollar gained 0.2 percent to $1.3067 per euro at 5 p.m. New York time after touching $1.3207 yesterday, the weakest level since June 21. The U.S. currency lost 1.8 percent this week, the most since the five days ended Jan. 11. It rose 0.3 percent to 99.22 yen, paring a 2 percent decline this week. The euro was little changed at 129.66 yen.

Futures traders increased their bets that the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 40,900 on July 9, compared with net shorts of 16,090 a week earlier.

Rupee Gains

India’s rupee completed its first weekly gain since May, rising as policy makers took steps to curb speculation and boost dollar supply. The currency strengthened 1 percent this week to 59.63 per dollar in Mumbai, the first advance since the five days ended May 3. The currency gained 0.1 percent today.

Russia’s currency dropped for the first time in five days as Bank Rossii left interest rates unchanged. The ruble weakened as much as 0.7 percent to 32.7960 per dollar before trading at 32.6265, down 0.1 percent.

The Bloomberg Dollar Index, which tracks the greenback against 10 other major currencies, rose 0.3 percent to 1,037.63 after sliding 1.4 percent yesterday.

The greenback slid for the week against 14 of 16 most-traded peers after Bernanke in a July 10 speech damped speculation the Fed would reduce its bond-buying program.

“Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” Bernanke said.

Policy Report

The Fed chief is scheduled to deliver a semi-annual monetary policy report to Congress next week.

The central bank buys $85 billion of Treasuries and mortgage debt each month to put downward pressure on borrowing costs, which tends to devalue the U.S. currency.

Plosser, who has opposed the current round of asset purchases, said the Fed should end its bond buying by year-end.

“I don’t want to do it all at once, but I think we should begin to taper very soon and hopefully end it by the end of this year,” Plosser said today in an interview in Jackson Hole, Wyoming. “That would be a healthy thing for the economy. We can do it gradually.”

Minutes of the Fed’s last meeting, released July 10, showed “about half” of 19 participants in a Federal Open Market Committee discussion indicated “it likely would be appropriate” to end the purchases late this year.

“The general consensus is that QE tapering is still coming in September, and I don’t think Bernanke’s comments have changed that,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit, said by phone from Stamford, Connecticut.

ECB Pledge

ECB President Mario Draghi pledged last week to keep borrowing costs low for an extended period. The ECB’s key interest rate is a record-low 0.5 percent.

“We still have the Fed normalizing policy; on the other hand, we have the ECB, which is clearly on the path of becoming more expansionary,” said Ulrich Leuchtmann, the head of currency strategy at Commerzbank AG in Frankfurt. “People are betting now on good entry levels for U.S.-dollar long positions.” A long position is a bet that an asset will gain.

Fitch said it downgraded France by one step to AA+, from AAA. The cut highlighted concern about lack of growth and the buildup of debt in Europe’s second-largest economy.

Portuguese 10-year bonds dropped for a third day as political upheaval in the nation intensified. President Anibal Cavaco Silva said July 9 that early elections were undesirable and urged the ruling coalition parties and the main opposition to reach a “national salvation” pact.

The bond yields climbed to 7.84 percent, approaching a seven-month intraday high of 8.11 percent reached July 3.

Options Trading

Trading in over-the-counter foreign-exchange options totaled $29 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 $4.9 billion, the largest share of trades at 17 percent. Euro-dollar options totaled $4.5 billion, or 16 percent.

Dollar-yen options trading was 44 percent less than the average for the past five Fridays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 67 percent more than average.

Australia’s dollar slid against all of its 16 most-traded counterparts as traders increased bets the nation’s central bank will cut interest rates next month from a record low.

Swaps data compiled by Bloomberg show traders see a 66 percent chance the Reserve Bank of Australia will cut its 2.75 percent benchmark rate to an unprecedented 2.5 percent at its next meeting on Aug. 6. The probability was 45 percent at the start of the week.

The Aussie dropped 1.5 percent to 90.49 U.S. cents and touched 89.99 cents, the weakest since September 2010.

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