Dollar Rallies as Fed Fails to Erase U.S. Stimulus Speculation

The dollar rallied as a weaker-than-forecast unemployment report and the Federal Reserve’s pledge to keep buying bonds failed to erase speculation that policy makers will being winding down the program this year.

The Bloomberg U.S. Dollar Index snapped three weeks of declines even as the Fed said persistently low inflation could hamper the economic expansion. Australia’s dollar declined as the nation boosted its budget-deficit forecast. The euro fell from a six-week high as the European Central Bank said interest rates may stay low for an extended period. The U.S. Census Bureau may report Aug. 6 that the trade deficit shrank in June.

“The payroll report wasn’t weak enough to significantly undermine the U.S. economic outperformance story, which I think is the main driver of bullish dollar views,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a telephone interview. “This would be consistent for our expectation for December tapering instead of September.”

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 other major currencies, gained 0.6 percent to 1,028.74 this week in New York, and touched the highest level since July 19.

The U.S. tender gained against all but two of its 16 most-traded peers on the week. It gained less than 0.1 percent to $1.3276 per euro and rose 0.7 percent to 98.94 yen. Japan’s currency dropped 0.7 percent to 131.34 per euro.

‘Dollar Wins’

The 162,000 employment gain followed a revised 188,000 rise in June that was less than initially estimated. The median forecast of 93 economists surveyed by Bloomberg called for a 185,000 jobs gain. The unemployment rate dropped to 7.4 percent from 7.6 percent.

The dollar “holds its own until there’s more synchronized growth around the world,” Kathleen Gaffney, a portfolio manager in Boston of the Eaton Vance Bond Fund at Eaton Vance Corp., which oversees $261 billion, said in a phone interview.

“We are going through a bit of an adjustment where the U.S. continues to move forward, Europe has stabilized, Japan’s in question,” she said. “Between the three, the dollar wins out. Certainly higher rates will pull money into the U.S., as well.”

Growth Forecasts

The U.S.’s gross domestic product will expand 1.8 percent in 2013 and 2.7 percent next year, according to the median forecast of 79 economists surveyed by Bloomberg. GDP in countries using the 17-nation euro will shrink 0.6 percent before growing 1 percent, while Japan’s is estimated to increase 1.8 percent and 1.4 percent, separate surveys show.

The U.S. trade deficit eased to $43.3 billion in June from $45 billion the previous month, according to the Bloomberg survey median.

Fed Chairman Ben S. Bernanke said June 19 after the Fed’s policy meeting that the central bank may start dialing back its bond-buying program this year and end it entirely in mid-2014 if the economy achieves sustainable growth. The Fed has been buying $40 billion of mortgage bonds and $45 billion of Treasuries to inject cash into the economy.

A Federal Open Market Committee report on July 31 left the monthly pace of bond purchases unchanged, while saying in a statement “the committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”

Market ‘Urgency’

The payrolls report “doesn’t necessarily change the view on when tapering will happen, but it reduces the urgency in the market because of the positioning,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA, said by phone from New York. “I would guess the market is no longer long dollar. It’s probably marginally short dollar, and that’s helped put that move higher in euro.” A long position is a bet an asset, in this case the U.S. dollar, will increase in value. A short position is a wager it will decrease.

Futures traders increased their bets that the Australian dollar will decline against the U.S. dollar to the most on record going back to 1993, 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 Australian dollar compared with those on a gain -- so-called net shorts -- was 72,573 on July 30, compared with net shorts of 63,982 a week earlier.

Biggest Drop

The Aussie had the biggest decline among the U.S. dollar’s major peers as the Australian government predicted the budget deficit for the year ending June 30, 2014, will be A$30.1 billion ($26.8 billion), compared with a previous forecast for an A$18 billion shortfall.

The Reserve Bank of Australia will probably cut Australia’s overnight cash rate target by 25 basis points, or 0.25 percentage point, to 2.5 percent at a policy meeting on Aug. 6, according to 26 of 27 economists surveyed by Bloomberg News. Traders agree, seeing a 94 percent chance of a reduction, according to interest-rate swaps data compiled by Bloomberg.

The Australian dollar lost 3.7TK percent to 89.16 U.S. cents this week.

ECB President Mario Draghi said on Aug. 1 that interest rates in the euro zone will remain low for an extended period of time. He also said there are indications that the combined economy of the currency bloc is stabilizing.

The ECB and the Bank of England left their benchmark interest rates unchanged at 0.5 percent, as forecast by economists in Bloomberg surveys.

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