Dollar Rises to 2-Week High Versus Euro as Fed Begins Tapering

The dollar climbed to the strongest level in almost two weeks against the euro as investors assess Federal Reserve plans to wind down bond-buying next year amid signs that economic growth is gaining momentum.

The U.S. currency advanced versus most of its 16 major counterparts after the Federal Open Market Committee said yesterday it would slow monetary stimulus to $75 billion a month from $85 billion. South Korea’s won led declines in emerging-market currencies amid speculation the U.S. central bank will keep reducing stimulus that has boosted asset prices around the world. The yen strengthened as Bank of Japan policy makers started a two-day meeting.

“The dollar has taken a lot of strengthening from the tapering news, and I do expect it to continue,” Fabian Eliasson, head of U.S. currency sales in New York at Mizuho Financial Group Inc., said in a phone interview. “On a marco level, the U.S. is decreasing its stimulus program, when you have the BOJ to increase it, and to initiate a new round of quantitative easing. Same thing goes for Europe.”

The dollar rose 0.2 percent to $1.3661 per euro at 5 p.m. New York time after advancing to $1.3650, the strongest level since Dec. 6. The U.S. currency was little changed at 104.25 yen. The yen gained 0.2 percent to 142.40 per euro after sliding to 142.90 yesterday, the weakest level since October 2008.

Dollar Measures

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major peers, rose 0.2 percent to 1,023.08 after gaining 0.5 percent yesterday. Another gauge of the greenback, the U.S. Dollar Index, will gain 4 percent next year, FxPro Group’s Smith said.

Deutsche Bank AG’s volatility index for major currencies dropped to 7.96 percent from 8.03 percent yesterday. It rose to a one-year high of 11.21 percent in June after Fed Chairman Ben. S. Bernanke said the central bank may start slowing stimulus.

South Korea’s won slid 0.9 percent to 1,060.22, while Indonesia’s rupiah fell 0.4 percent to 12,208 and touched its weakest level in five years.

An equally weighted basket of the so-called BRICS emerging-market currencies fell against the dollar to 95.5, the lowest since Dec. 5. BRICS refers to Brazil, Russia, India, China and South Africa. The carry-trade gauge has declined from a high this year of 101.5 in May.

Market Reading

“The market is still trying to digest the implications of a reduction in asset purchases, combined with looser forward guidance,” Abbas Ameli-Renani, London-based emerging-market strategist at Royal Bank of Scotland Group Plc, said by e-mail. “The broader picture remains strategically unchanged and the market can now move on.”

While trimming stimulus at its two-day meeting that ended yesterday, the Fed reinforced its assurance that interest-rate increases are far off by saying its benchmark rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent.”

The central bank has kept the target for the federal-funds rate at a range of zero to 0.25 percent since December 2008.

The index of U.S. leading indicators rose more than forecast in November. The Conference Board’s index, a gauge of the outlook for the next three to six months, increased 0.8 percent last month after rising 0.1 percent in October, the New York-based group said. The median forecast of economists surveyed by Bloomberg called for an advance of 0.7 percent.

Corruption Investigation

Turkey’s lira fell, approaching a record against the dollar, after Prime Minister Recep Erdogan removed officers from a corruption case that has embroiled government ministers.

The lira dropped as much as 1.1 percent against the dollar after earlier rallying 0.5 percent when the central bank said it will increase dollar sales to prop up the currency. It traded at 2.0726 per dollar, almost the record 2.0841 reached Sept. 5.

Erdogan fired 50 police commanders, including Istanbul chief Huseyin Capkin, and vowed to reveal a “state within a state,” following a corruption investigation targeting his party.

Bank of Japan officials see significant scope to increase government-bond purchases from 7 trillion yen ($67 billion) a month if needed to achieve their 2 percent inflation target, according to people familiar with the central bank’s discussions. Of 37 economists surveyed by Bloomberg last month, 19 predicted the BOJ would extend monetary easing from April to June next year.

“The direction of the dollar is not just about Fed policy, it’s about how other central banks respond,” Derek Halpenny, European head of global-markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said on Bloomberg Television’s “The Pulse” with Guy Johnson. “You’ve got to pick and choose.”

The U.S. currency has risen 4.2 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro gained 8.4 percent, while the yen tumbled 15 percent.

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