Dollar Rises on Fed Inflation View; Canada Dollar Appreciates

The dollar rose against the euro as Treasury yields climbed on speculation inflation may accelerate faster than Federal Reserve Chair Janet Yellen projects and prompt the central bank to increase interest rates next year.

The U.S. currency had the biggest weekly decline against the euro in two months as the Fed announced June 18 it will reduce monthly bond-buying while holding its interest-rate target at virtually zero. The Canadian dollar rallied to a five-month high after reports showed inflation and retail sales exceeded projections. The pound rose for a third week as traders had the most bullish futures wagers since 2007. A gauge of currencies volatility increased from a record low.

“There’s a little bit of inflation talk out there,” said Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut. “It’s supporting the dollar a little bit.”

The dollar gained 0.1 percent to $1.3600 per euro at 5 p.m. in New York, falling 0.4 percent this week, the most since the period ended April 11. The U.S. currency rose 0.1 percent to 102.07 yen. The euro rose 0.1 percent to 138.82 yen.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 of its major counterparts, was little changed at 1,009.83. It dropped to 1,008.19 yesterday, the lowest since May 21.

Yields Rise

Treasury five-year yields rose as much as four basis points, or 0.04 percentage point, to 1.72 percent. JPMorgan Chase & Co.’s Global FX Volatility Index was at 5.58 percent after reaching 5.51 percent yesterday, the least since Bloomberg started collecting the data in 1992.

Sterling gained 0.3 percent this week to $1.7013, after rallying 1 percent last week. Bank of England Governor Mark Carney said June 12 that the first interest-rate increase “could happen sooner than markets currently expect.”

The difference in the number of wagers by hedge funds and other large speculators on an advance in the pound compared with those on a drop -- so-called net longs -- was 52,596 on June 17, the highest level since December 2007.

Canada’s consumer price index gained to 2.3 percent in May from a year earlier and exceeded the Bank of Canada’s target for the first time in more than two years. Retail sales rose more than forecast in April.

The Canadian dollar rose 0.6 percent to C$1.0758 versus its U.S. counterpart, reaching the strongest level since Jan. 7.

Zloty Fall

The zloty has declined against all but one of its 13 developing-European peers since Wprost magazine released recordings on June 14 in which central bank Governor Marek Belka was heard discussing with Interior Minister Bartlomiej Sienkiewicz steps to boost the economy and help the government win an election next year. Poland may be forced to hold a snap ballot, according to Prime Minister Donald Tusk, who in 2011 became the first Polish premier to win a second term since the end of communism a quarter-century ago.

The Polish currency declined 0.5 percent to 4.1689 per euro, leaving it 1.2 percent lower this week.

Economic data next week will show recovery of the world’s biggest economy is still uneven. The Markit Economics preliminary index of U.S. manufacturing slid in June to 56 from 56.4 a month earlier, according to a Bloomberg survey before the data on June 23. A reading above 50 indicates growth. Economists in a separate survey predict existing home sales will rise 1.9 percent from 1.3 percent a month earlier.

“The dollar will continue to consolidate,” said Kazuo Shirai, a trader at Union Bank NA in Los Angeles. “Unless we see the next key U.S. data turn positive, this mini trend of dollar selling is here to stay.”

Yellen View

Yellen brushed aside concern that inflation will quicken in her opening statement and press conference on June 18, emphasizing the Federal Open Market Committee’s view rates are likely to stay low for a “considerable time.” Futures traders are pricing in a 93 percent chance the board will keep the federal funds target rate at zero to 0.25 percent by the end of this year, according to data compiled by Bloomberg.

The Fed’s preferred measure of inflation may have moved closer to the central bank’s 2 percent goal in May. The personal consumption expenditures price index rose 1.8 percent last month from a year earlier, according to the median estimate of 19 economists and strategists in a Bloomberg survey, after a 1.6 percent gain in April that was the most since November 2012.

The consumer price index increased 0.4 percent in May, the biggest advance since February 2013, the Labor Department reported June 17. It was the third monthly increase.

“The Fed meeting’s impact on the bond market is already disappearing,” Hans Redeker, head of global currency strategy at Morgan Stanley in London, said in a phone interview. “Higher U.S. bond yields have positive impact on volatilities,” supporting the dollar.