Dollar Rises to 5-Year High Versus Yen as Fed Trims Bond Buying

The dollar rose to a five-year high versus the yen after the Federal Reserve officials voted to reduce monthly asset purchases that are seen as debasing the U.S. currency amid signs that economic growth is strengthening.

The U.S. currency gained against most of its major peers after the central bank announced plans to cut its monthly bond purchases to $75 billion from $85 billion, taking its first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s. The Fed acted as a report showed housing starts last month reached a five-year high and the Labor Department reported Dec. 6. the unemployment rate declined to 7 percent in November, the lowest in five years.

“The reason we saw the bounce is that even though markets may have been looking for a stronger commitment on tapering the asset purchase program, the fact that the Fed decided to go with the $10 billion reduction today puts policy on the first step towards the long road towards the exit,” Sireen Harajli, a strategist at Mizuho Bank in New York, said in an interview. “This is contrast to the Bank of Japan, which is expected to add stimulus in April of next year.”

The Bloomberg U.S. Dollar Index, which monitors the greenback against 10 major counterparts, gained 0.5 percent to 1,020.70 at 5 p.m. in New York. The greenback added 1.6 percent 104.29 yen, after reaching 104.36, the highest level since Oct. 6, 2008. The U.S. currency advanced 0.6 percent to $1.3685 versus Europe’s 17-nation common currency.

Dollar Positive

“The dust still has to settle, but ultimately it’s positive for the dollar,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a phone interview. “The fact the Fed did taper shows it’s confident about the pace of recovery, and the financial market can withstand modest reduction at this time.”

The central bank left unchanged its statement that it will probably hold its target interest rate at almost zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent. Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent since 2008.

At the same time, the Fed reinforced its assurances that it’s a long way from raising borrowing costs, saying that its benchmark rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

Bernanke View

“While we have passed or made significant progress on the labor market and growth hurdles, there is still this concern about inflation,” Bernanke said at a press conference after the Federal Open Market Committee’s meeting. “If inflation does not show signs of returning to target we will take appropriate action.”

The Fed was forecast to start curtailing its monthly bond purchases this week after unexpectedly refraining from reducing them in September, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, an increase from 17 percent in a Nov. 8 survey.

Housing starts jumped 22.7 percent to a 1.09 million annualized rate, exceeding all forecasts of economists surveyed by Bloomberg and the most since February 2008, data from the Commerce Department showed today in Washington. Permits for future projects held at almost a five-year high, indicating the pickup will be sustained into 2014.

November payrolls grew by 203,000 positions, exceeding forecasts for a 185,000 increase and the U.S. jobless rate fell to 7 percent.

Japan’s Exports

The yen fell earlier as the nation’s trade deficit widened to a record.

Japan’s merchandise trade deficit for November was 1.35 trillion yen on a seasonally adjusted basis, compared with the 1.2 trillion yen median estimate in a Bloomberg News survey of economists. Imports climbed 21.1 percent from a year earlier while exports rose 18.4 percent, the finance ministry said.

“The trade data is having a big impact on the yen,” said Kathleen Brooks, European research director at Forex.Com in London. “The yen will have the biggest reaction” to a U.S. cut in stimulus because “if the Fed decides to taper, it leaves the BOJ on its own,” she said, referring to the Bank of Japan. That may weaken the yen toward 105 per dollar, Brooks said.

Bank of Japan officials see significant scope to increase government-bond purchases if needed to achieve their inflation target, according to people familiar with the discussions.

Policy Outlook

Seventy-one percent of economists surveyed by Bloomberg expect the BOJ to leave policy unchanged at the two-day meeting starting tomorrow, and will escalate stimulus after a bump in the national sales tax in April.

The pound rose for the first time in six days versus the dollar after U.K. unemployment fell to 7.4 percent in the three months through October, fueling speculation the Bank of England will need to raise interest rates sooner than it plans.

The Bank of England, led by Governor Mark Carney, has pledged to keep borrowing costs low until unemployment falls to 7 percent, subject to caveats on financial stability and the central bank’s inflation target of 2 percent.

Sterling added 0.8 percent to $1.6391.

Peso Drop

Argentina’s peso fell the most in four years as the government allows the currency to depreciate to make the country’s exports more competitive.

The peso fell 0.7 percent to 6.3769 per dollar, the biggest slide since March 2009. It’s weakened 23 percent this year, the most among 24 emerging-market currencies tracked by Bloomberg, almost matching inflation estimated at 26 percent.

President Cristina Fernandez de Kirchner’s government has sped up the rate of decline of the peso since July, when the currency started posting monthly losses of at least 2 percent, as a narrowing trade surplus contributes to the steepest drop in international reserves in a decade. Faster depreciation also reduces incentives for Argentines, who are banned from purchasing foreign currency for savings, to buy dollars in the black market as the spread between the two rates narrows.

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