Dollar Rallies as Economic Data Boosts Outlook for Fed Taper

The dollar rallied against the majority of its 16 most-traded peers as economic data exceeding forecasts spurred speculation that the Federal Reserve will trim the pace of its bond purchases as early as September.

The Bloomberg U.S. Dollar Index rebounded from a decline last week as jobless claims decreased to their lowest level since 2007. The euro gained versus the yen as a report showed the 17-nation region pulled out of recession. Britain’s pound rose versus all its major peers after unemployment requests dropped more in July than economists forecast. The Federal Open Market Committee may offer clues to its thoughts on tapering next week when it release minutes for its last policy meeting.

“All the U.S. data that’s been coming out recently, it all leads back to Fed tapering expectations, and that’s really what’s driving the markets,” Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York, said yesterday. “That’s why markets are so sensitive to economic data. It’s still on track because we’re still seeing improvement.”

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 other major currencies, gained 0.5 percent to 1,022.06 this week in New York.

The U.S. tender gained 0.1 percent to $1.3329 per euro and climbed 1.4 percent to 97.53 yen, the biggest gain since July 19. Japan’s currency dropped 1.3 percent to 130.00 per euro.

Winners, Losers

New Zealand’s dollar was the biggest winner after the pound this week among the greenback’s major counterparts, with a 0.8 percent gain. The Brazilian real was the biggest loser, sliding 5 percent, while Mexico’s peso dropped 2.7 percent.

The euro has rallied 5.1 percent this year, the most among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, while the dollar rose 3.9, the second-most. The Australian dollar dropped 9.4 and the yen slipped 8.8 percent to lead decliners.

JPMorgan Chase & Co.’s G-7 Volatility Index increased to 9.26 percent after touching 9.04 percent on Aug. 12, the lowest intraday level since May 9.

The number of U.S. applications for unemployment insurance payments declined by 15,000 to 320,000 in the week ended Aug. 10, the fewest since October 2007, from a revised 335,000, a Labor Department report showed Aug. 15 in Washington. The median forecast of 44 economists surveyed by Bloomberg called for applications totaling 335,000.

Retail Sales

U.S. retail sales increased for a fourth month in July, rising 0.2 percent following a 0.6 percent gain in June that was larger than previously reported, according to Commerce Department figures issued in Washington. The median forecast of 81 economists surveyed by Bloomberg called for a 0.3 percent advance. The measure of demand that feeds into gross domestic product also climbed by the most this year.

Fed Chairman Ben S. Bernanke will reduce the central bank’s $85 billion of monthly bond purchases next month, according to 65 percent of economists surveyed by Bloomberg. The FOMC’s first step may be small, with monthly purchases tapered by $10 billion to a $75 billion pace, according to the survey conducted Aug. 9-13.

All of this positive data “is clearly having a positive impact on the dollar,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in an Aug. 15 telephone interview. “It’s the type of data that cumulatively supports the idea of a September taper by the Fed.”

European Expansion

GDP in the 17-nation euro area expanded 0.3 percent in the second quarter after a 0.3 percent contraction in the previous three months, the European Union’s statistics office in Luxembourg said. The report showed that the region successfully emerged from its longest recession in history.

German GDP increased 0.7 percent, more than the 0.6 percent gain forecast by economists, while France’s expanded 0.5 percent following two quarters of contraction.

“The upside surprise shows an underlying improvement in the euro zone as strong exports weakened the contraction in Spain and Italy and spurred growth in core countries, especially France,” Ricardo Santos, an economist at BNP Paribas SA in London, said in an Aug. 14 interview. “We’ll have to wait more to see any improvement in the labor market, but this shows the worst part of the recession is probably over.”

Franc Drops

The Swiss franc slid to its weakest level in a month against the euro after the report showed the 17-nation region pulled out of recession last quarter. The currency decreased 0.4 percent to 1.2349 per euro and fell 0.4 percent to 92.65 centimes per dollar.

Futures traders reversed their bets that the franc will decline against the 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 an advance in the franc compared with those on an decline -- so-called net longs -- was 2,136 on Aug. 13, compared with net shorts of 325 a week earlier.

Britain’s pound strengthened 3.1 percent in the past month versus the dollar as reports showed purchasing managers indexes of manufacturing, services and construction all improved in July while house prices increased and jobless claims fell twice as fast as predicted. The economy expanded by 0.6 percent in the second quarter.

“The pound has been doing better,” Peter Kinsella, senior foreign-exchange strategist at Commerzbank AG in London, said in an Aug. 15 interview. “The main factors have been a decent improvement on the yield side and positive PMI and unemployment data. The economy is slightly better but that’s coming from a low base.”

The U.K. currency rose 0.9 percent to $1.5629 after touching $1.5657 yesterday, the strongest level since June 19. Sterling appreciated 0.9 percent to 85.28 pence per euro.

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