Dollar Gains on Taper Speculation Before FOMC; Aussie Declines

The dollar gained versus the majority of its most-traded counterparts amid speculation that the Federal Reserve will reiterate plans to slow the pace of monthly asset purchases this year.

Australia’s dollar approached the weakest level in three years versus its U.S. counterpart after the central bank governor said there’s still room to cut interest rates and the currency may depreciate further. The yen fell from the strongest level in two weeks versus the euro after Japan’s industrial production slid by the most in two years. Bloomberg’s U.S. Dollar Index gained before the Fed’s two-day Federal Open Market Committee policy meeting that concludes tomorrow.

“We’re seeing positioning ahead of the Fed,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a telephone interview. “The market came into the week short dollars, and we’re seeing an unwinding of those trades heading into the FOMC meeting on the risk that the Fed will continue to signal that tapering is on the table for later this year.”

The greenback increased 0.1 percent to 98.03 yen at 5 p.m. New York time, after rising as much as 0.5 percent. The dollar was little changed at $1.3263 per euro. The shared currency added 0.1 percent to 130.01 per yen.

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 other major currencies, rose 0.3 percent to 1,026.81 after dropping to 1,021.21 yesterday, the lowest since June 19.

Krona, Rupee

Sweden’s krona depreciated against all but one of its 16 major peers after data showed gross domestic product contracted 0.1 percent in the three months through June, after growing 0.6 percent in the prior quarter, according to preliminary data from Stockholm-based Statistics Sweden. The economy was forecast to expand 0.1 percent by a Bloomberg survey of 12 economists before the report.

The krona depreciated 1.3 percent to 8.6972 per euro and fell 1.2 percent to 6.5576 per dollar.

The Indian rupee declined versus all 31 of its most-traded counterparts after the country’s central bank kept interest rates unchanged and said steps taken this month to tighten the cash supply will be rolled back as the currency stabilizes. The currency depreciated 1.8 percent to 60.4850 after falling as much as 2 percent, the most since June 20.

Switzerland’s franc rose the most compared with its major peers, increasing 0.2 percent to 92.97 centimes per dollar after touching 92.76. It gained 0.1 percent to 1.2331 per euro.

No Shift

“Recent inflation data do not appear to have shifted” the Reserve Bank of Australia’s assessment that the outlook for prices may “afford some scope to ease policy further if needed to support demand,” Stevens said during a speech in Sydney. “The recent decline in the exchange rate seems to make sense from a macroeconomic perspective. It would not be a major surprise if a further decline occurred over time.”

The RBA, which has left the cash rate unchanged at a record-low 2.75 percent for the past two meetings, next meets on Aug. 6. The Australian currency extended declines after government figures showed building approvals fell 6.9 percent on a month-over-month basis, the largest fall in a year. The median forecast of 21 economists was for a 2 percent decline.

The Aussie declined 1.6 percent to 90.62 U.S. cents after reaching 89.99 cents on July 15, the lowest level since September 2010.

The Aussie has depreciated 10 percent this year, the worst performance among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro is the best performer, gaining 5.4 percent, while the dollar appreciated 4.8 percent and the yen declined 8.5 percent.

Economic Data

The yen earlier fell against the dollar after the Trade Ministry in Tokyo said Japanese industrial production slid 3.3 percent in June, the sharpest decline since March 2011. Time will be needed before the central bank’s inflation target is reached, Bank of Japan Governor Haruhiko Kuroda said this week.

“We had very disappointing data for Japan’s industrial production in June and that’s weakened the yen,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “For now the Bank of Japan will wait and see how what they’ve done so far works, but if inflation doesn’t pick up then they might implement some more measures. The yen will weaken further.”

Japan’s currency will depreciate to 115 per dollar by year-end, Commerzbank’s Karpowitz predicted.

The U.S. Conference Board’s index of consumer sentiment decreased to a reading of 80.3 from a revised 82.1 the prior month that was stronger than initially estimated, figures from the New York-based private research group showed today. The median forecast in a Bloomberg survey of economists was for a reading of 81.3.

Dollar Rises

Investors have trimmed bets of an early end to the Fed’s program of quantitative easing, which had increased after Chairman Ben S. Bernanke said on June 19 that policy makers would taper their $85 billion in monthly bond purchases this year and end it around mid-2014 if the economy performed in line with their expectations.

Bernanke told lawmakers on July 17 that the central bank’s asset purchases “are by no means on a preset course,” and could be reduced or expanded as economic conditions warrant.

“It’s hard to imagine the FOMC having any substantial discussion on tapering this time around,” said Kazuo Shirai, a trader at Union Bank NA in Los Angeles. “Policy makers will probably emphasize that the labor market is still weak.”

Options Trading

Trading in over-the-counter foreign-exchange options totaled $29.4 billion, compared with $19 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 $7.2 billion, the largest share of trades at 25 percent. Options on the Aussie dollar-greenback rate totaled $4.3 billion, or 15 percent.

Dollar-yen options trading was 10 percent more than the average for the past five Tuesdays at a similar time in the day, according to Bloomberg analysis. Aussie-greenback options trading was 62 percent more than average.

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