Dollar Ends 3-Day Rally as Investors Weigh Outlook; Aussie Gains

The dollar fell versus its major peers for the first time in four days, paring a weekly gain, as investors weighed prospects for U.S. economic growth against signals the Federal Reserve will raise interest rates next year.

Higher-yielding currencies led by the Australian dollar gained as risk appetite increased. Canada’s currency climbed after the nation’s retail sales rose. The Bloomberg Dollar Spot Index declined from a five-week high it reached after the Fed shifted this week to more qualitative rate guidance and Chair Janet Yellen said borrowing costs could start rising “around six months” after the central bank ends bond purchases.

“What we’re seeing is a bit of a disappointment in the lack of follow-through strength of the dollar,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc, said in a telephone interview. “While we have got that change from the Fed on forward guidance, we haven’t got any data to back up a hawkish or dovish Fed.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 major counterparts, declined 0.2 percent to 1,019.26 at 5 p.m. in New York. It gained 0.6 percent this week, the most since the five days ended Jan. 17. It climbed yesterday to 1,023.65, the highest since Feb. 13.

The dollar slipped 0.1 percent to $1.3794 per euro. It advanced to $1.3749 yesterday, the strongest level since March 6. The U.S. currency was down 0.1 percent to 102.25 yen, and the yen was little changed at 141.04 per euro.

Net Shorts

Futures traders decreased their bets the yen will decline against the U.S. dollar to the lowest level since October, 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 yen compared with those on a gain -- so-called net shorts -- was 61,099 on March 18, compared with net shorts of 99,356 a week earlier.

A gauge of currency volatility dropped to a 15-month low. JPMorgan Chase & Co.’s Group of Seven nations volatility index fell to 7.23 percentage points, the least since December 2012. The average over the past year was 8.94 percentage points.

Canada’s dollar, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, advanced versus most major peers after the nation’s statistics agency said retail sales increased 1.3 percent, the fastest pace in eight months, to C$40.7 billion ($36.2 billion) in January.

The loonie gained 0.2 percent to C$1.1221 per U.S. dollar. It touched C$1.1279 yesterday, the weakest level since 2009.

Aussie Rises

The Australian dollar rose after Citigroup Inc.’s Economic Surprise Index for the nation increased to 50.60 on March 13, the highest level since May 23. A positive reading signals that reports have exceeded economists’ estimates.

Australia’s currency strengthened 0.5 percent to 90.81 U.S. cents, extending its weekly advance to 0.6 percent.

The policy-setting Federal Open Market Committee on March 19 discarded a jobless-rate threshold for considering when to increase borrowing costs and said it will look at a wider range of data. It has held the benchmark interest-rate target at zero to 0.25 percent since 2008. Policy makers also decided to lower monthly bond-buying by $10 billion, the third consecutive cut of that size.

In a statement after the two-day session, the Fed said U.S. economic growth was slower in the winter amid storms. Still, it said, there’s “underlying strength in the broader economy.”

‘Considerable Time’

Yellen said at a press conference she saw a “considerable time” between the end of bond-purchase stimulus and the first rate boost, meaning “around six months or that type of thing.”

Dallas Fed Bank President Richard Fisher said bond-buying will end in October at the Fed’s current pace of reductions. He said in a speech in London today that policy makers have “exhausted the efficacy” of the stimulus.

The dollar appreciated 0.8 percent this week in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It was the third-best performer. The yen and the euro each weakened 0.2 percent.

“We remain bullish on the dollar,” said Athanasios Vamvakidis, head of Group of 10 currency strategy at Bank of America Corp. in London. “If we start to get good U.S. data, the market will be much more comfortable longing dollar.” Long positions are bets a currency will rise in value.

Implied volatility of the euro and the Aussie and New Zealand dollars versus the greenback may increase because the Fed’s new rate guidance lacks clarity, Commonwealth Bank of Australia said.

“The vagueness of the new guidance means there is potential for markets to ‘over-react’ in coming months by bringing forward the pricing for funds-rate hikes and/or price additional funds-rate hikes over and above what FOMC policy makers want,” Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank, wrote in a note yesterday. “Increased uncertainty about the FOMC’s reaction function may lead to more volatility in asset markets.”

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