Dollar Advances Against Yen on Policy Divergence; Real Rises

The dollar rose against the yen, extending its biggest weekly advance this year, amid speculation the Federal Reserve will keep cutting stimulus while the Bank of Japan maintains its bond-purchase plan.

The U.S. currency advanced after the Group of 20 backed the normalization of monetary policy in advanced economies, according to a draft communique seen by Bloomberg News. The 18-nation euro rallied as Ukranian leaders reached a peace agreement and lawmakers voted to free jailed ex-Prime Minister Yulia Tymoshenko. The real climbed as Brazil reported higher-than-forecast foreign investment a day after the government pledged to reduce spending.

“Risk improved this week, and with the Ukraine truce, and Tymoshenko getting released, it’s risk positive,” Dan Dorrow, the head of research at Faros Trading LLC in Stamford, Connecticut, said in a phone interview. “Dollar-yen is just a play on that.”

The dollar rose 0.2 percent to 102.51 yen at 5 p.m. in New York, extending this week’s advance to 0.7 percent, the biggest since the period through Dec. 27. The euro gained 0.2 percent to $1.3746. The yen dropped 0.4 percent to 140.90 per euro.

Ukraine Update

Turkey’s currency and the euro climbed versus the dollar amid the peace deal in Ukraine as they are being traded as a proxy for the less-liquid hryvnia, said Douglas Borthwick, the head of foreign exchange at Chapdelaine & Co. in New York.

“A deal in Ukraine means a move back towards a semblance of stability, and this is translating into a stronger euro-dollar and Turkish lira against the U.S. dollar,” he said.

Turkey’s lira gained 1.1 percent to 2.1773 versus the dollar, on pace for the fourth-straight weekly gain.

Brazil’s government said yesterday it will cut 44 billion reais ($18.7 billion) from this year’s budget, allowing Brazil to meet a primary surplus target, excluding interest payments, of 1.9 percent of gross domestic product. While the central bank reported that foreign direct investment declined to $5.1 billion last month, the amount was higher than the median forecast of analysts surveyed by Bloomberg, which called for $4 billion.

The real appreciated 1 percent to 2.3457 per U.S. dollar, the strongest on a closing basis since Jan. 20. The currency was headed for a weekly increase of 1.8 percent.

Asian Currencies

South Korea’s won led Asian currency declines this week as a gauge of manufacturing in China, the nation’s biggest export market, fell to a seven-month low. Thailand’s baht was set for its steepest five-day drop of 2014 as anti-government protests turned deadly, while violence in Ukraine also damped sentiment.

China’s yuan dropped 0.5 percent to 6.1043 per dollar in offshore trading, extending this week’s slide to 1.1 percent.

The G-20 backed the withdrawal of stimulus and said central banks in member nations “maintain their commitment that monetary policy settings will continue to be carefully calibrated and clearly communicated,” according to the draft communique for this weekend’s meeting of finance ministers in Sydney. Fed Chair Janet Yellen will join officials for the talks starting tomorrow.

The Fed said in December it would start cutting bond purchases by $10 billion per month and policy makers decided on another reduction of the same size in January. Several officials said in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor” of continuing to trim purchases, according to the minutes of their Jan. 28-29 gathering.

Economic View

“The market is realizing that, get away from the distortions and the white noise effected by the weather, and things are actually improving quite quickly” in the U.S., Peter Frank, global head of G-10 and Asia currency strategy at Banco Bilbao Vizcaya Argentaria SA in London, said in a phone interview. In emerging markets, “there’s not been this big market dislocation that was threatened a couple of weeks ago. That’s adding to dollar strength, because the U.S. data, the forward indicators are very good.”

The dollar gained 0.5 percent in the past week, the third best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 0.9 percent, while the yen dropped 0.3 percent.

The Bank of Japan this week doubled a funding tool to 7 trillion yen ($68 billion) and said individual banks may borrow twice as much low-interest money as previously under a second facility. It retained its pledge to expand the monetary base by 60 trillion to 70 trillion yen per year. It is too early for a detailed discussion of exiting the strategy, central bank Governor Haruhiko Kuroda said today.

Hedge funds and other large speculators increased bets the yen will decline against the dollar, figures from the Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the yen compared with those on a gain -- so-called net shorts -- was 79,784 on Feb. 18, compared with net shorts of 78,786 a week earlier

Canada Update

Canada’s dollar fell against most of its 16 major peers as retailers ended 2013 with their biggest one-month drop in a year. Sales fell 1.8 percent to C$40.2 billion ($36 billion), Statistics Canada said in Ottawa, compared with a 0.4 percent drop that was the median forecast in a Bloomberg survey with 20 responses.

The nation’s inflation rate accelerated on a surge in home heating costs amid one of the most severe winters in decades. The consumer price index rose 1.5 percent in January from a year earlier, the most since June 2012, following December’s 1.2 percent pace, Statistics Canada said. The annual core rate, which excludes eight volatile products, accelerated to 1.4 percent from a 1.3 percent gain a month earlier. Economists surveyed by Bloomberg News forecast both rates at 1.3 percent.

The loonie, as the currency is nicknamed, fell 0.1 percent to C$1.1108 per U.S. dollar, after dropping as much as 0.9 percent. It weakened to C$1.1224 on Jan. 31, the weakest level since 2009.

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