Dollar Falls From 7-Week High on Economy; Aussie Gains

The dollar fell from a seven-week high as data showed the U.S. economy shrank for the first time in three years, increasing the case for the Federal Reserve to maintain record-low borrowing costs to stimulate growth.

The euro rose from almost a 3 1/2-month low before European Central Bank Governing Council member Carlos Costa speaks tomorrow amid speculation the central bank may expand stimulus next week. Australia’s dollar led gains among major peers on signs corporations’ capital expenditure will increase. China’s yuan ended a five-day skid as some investors judged the depreciation excessive. Declines in the dollar were limited as a separate report showed fewer Americans filed applications for unemployment benefits last week.

“The headline gross-domestic-production number was a bit worse than expected,” said Brian Daingerfield, currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “If interest rates continue to decline, we’re somewhat negative on the dollar in the near term.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, dropped 0.2 percent to 1,011.28 as of 5 p.m. in New York. It reached 1,013.55 yesterday, the highest level since April 8.

The euro rose 0.1 percent to $1.3602 after falling yesterday to the lowest level since Feb. 13. Europe’s currency was little changed at 138.45 yen, while the dollar traded at 101.79 yen.

Winners, Losers

The Russian ruble and Chile’s peso have gained 2.9 percent against the dollar this month, leading winners among 31 major currencies, according to data compiled by Bloomberg. The Swedish Krona dropped 2.2 percent while the Swiss franc slipped 1.9 percent, the biggest losers.

The euro rose even after ECB Executive Board member Yves Mersch said yesterday officials are “comfortable” with conventional and unconventional measures. Economists surveyed by Bloomberg News predict official data tomorrow will show retail sales growth in Germany was 0.2 percent last month, holding near the 0.1 percent pace in March that was the slowest this year.

ECB policy makers will meet on June 5 to decide whether to cut interest rates, two days after the release of May inflation data. President Mario Draghi said this month the currency’s gain is hurting the central bank’s effort to boost consumer prices.

The yuan reversed earlier losses as some investors judged excessive the slide that brought the currency within 0.1 percent of its weakest level since 2012.

Yuan Rally

The yuan gained 0.25 percent, the most since May 6, to close at 6.2399 per dollar, after dropping as much as 0.11 percent, China Foreign Exchange Trade System prices show. The currency, also known as renminbi, lost 0.35 percent in the last five trading days and its 14-day relative strength index was 67 at yesterday’s close, almost the 70 level that signals to some investors a change of direction is likely.

“The renminbi has fallen a bit too much too fast in recent days and entered into attractive territory for investors,” said Meng Xiangjuan, an analyst at Shenyin Wanguo Securities Co. in Shanghai. “As we expect China’s economic growth to improve in the second half, the yuan will reverse its depreciation trend. The central bank should also soon reduce its intervention in weakening the currency as its policy objective is to let markets play a bigger role.”

The Aussie advanced 0.8 percent to 93.07 U.S. cents even after data showed private capital expenditure fell 4.2 percent in the first quarter, compared with a 1.5 percent drop estimated in a Bloomberg survey.

Aussie Gain

“The Q1 CAPEX headline was weaker than expected, but details were firmer, with forward spending plans stronger than expected,” Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, wrote in a research note. “Further signs of an improvement in service sector capex plans will be welcomed by the central bank as the rotation of activity continues.”

The dollar fell as GDP contracted 1 percent in the three months through March, government figures showed, after a reading last month signaled 0.1 percent expansion.

“It’s almost June and we’re talking about Q1 data, but yes, it’s clearly a weak number,” Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said in a phone interview. “Like everyone else, I’m a dollar bull. On most long-term fundamental measures, the U.S. growth prospects look more secure than Europe.”

Jobless claims fell by 27,000 to 300,000 in the week ended May 24. The median forecast of 50 economists surveyed by Bloomberg called for 318,000. The four-week average declined to the lowest level since August 2007, before the last recession began.

Bond Yields

Treasury 10-year note yields rose two basis points, or 0.02 percentage point, to trade at 2.46 percent after touching the lowest level since June.

Policy makers are watching progress toward their goal of full employment as they consider the timing of the first interest-rate increase since 2006. Minutes released May 21 of the Fed’s April meeting showed officials said continued stimulus to push unemployment lower doesn’t risk sparking an undesirable jump in the inflation rate.

The dollar is forecast to strengthen to $1.32 per euro and 108 yen by the end of the year, according to the median estimates in Bloomberg surveys of analysts.

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