Dollar Rallies Most in 8 Weeks on Fed, Ukraine Turmoil

A dollar gauge rallied the most in eight weeks as the Federal Reserve acknowledged surprise in the improvement in the U.S. labor market and amid heightened geopolitical turmoil.

A basket of emerging-market currencies fell against the dollar this week as Russia and Ukraine blamed each other for the downing of a Malaysian Airline System Bhd. plane and Israel’s military began a Gaza ground incursion. The euro dipped below $1.35 for the first time in five months on diverging central-bank policies. Canada’s dollar climbed to the strongest level in a week after an inflation gauge rose. The Labor Department may report July 22 that consumer prices increased in June.

“The data shows the economy here is coming along,” Robert Lynch, a currency strategist at HSBC Holdings Plc in New York, said yesterday in a telephone interview. “You have the beginnings of policy normalization in the U.S.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major counterparts, gained 0.3 percent to 1,009.53 in New York, the biggest weekly increase since May 23. The benchmark touched 1,011.12, the highest since June 20.

The yen fell less than 0.1 percent to 101.34 per dollar on the week, and rose 0.6 percent to 137.08 per euro for a second weekly gain. The euro slid 0.6 percent to $1.3524, the biggest drop since June 13.

Winners, Losers

An equally weighted basket of the so-called BRICS emerging-market currencies, those of Brazil, Russia, India, China and South Africa, fell 0.5 percent this week to 97.73 versus the dollar after climbing 0.3 percent in the previous period.

South Africa’s rand and Mexico’s peso were the week’s biggest gainers of the dollar’s 31 major peers, adding 0.5 percent and 0.4 percent. Russian’s ruble dropped 2.6 percent, the most, followed by Chile’s peso at 2.4 percent.

Canada’s dollar gained as the nation’s consumer price index increased 2.4 percent from a year earlier, the fastest in more than two years, the government reported July 18. The data came two days after the Bank of Canada said inflation gains are temporary and that the nation’s economy won’t fully recover for two years. The bank held the benchmark interest rate at 1 percent, where it’s been for almost four years.

The loonie, as the Canadian dollar is known for the image of the aquatic bid on the C$1 coin, touched C$1.0709, the strongest level since July 11, before closing little changed.

Geopolitical Events

Malaysia’s ringgitt fell 0.2 percent on the week to 3.1817 after the jet flying from Amsterdam to Kuala Lumpur crashed in eastern Ukraine on July 17, killing all 298 people on board.

President Barack Obama said the U.S. has concluded that a surface-to-air missile launched from insurgent-held territory in eastern Ukraine downed the plane, while the governments of Ukraine and Russia blamed each other.

The crash came a day after the U.S. and European Union imposed additional sanctions on Russia.

“Since these geopolitical events are surrounding Ukraine and Russia, we saw the ruble down,” said Eric Viloria, a strategist at Wells Fargo & Co. in New York. “That also had to do with some of the increased sanctions. So if tensions escalate further, and if sanctions increase, that could have more of a negative impact on the ruble.”

The shekel erased early-week gains as Israel sent ground forces into the Gaza Strip in a military offensive aimed at stopping missiles fired by Hamas and other Palestinian militants after a cease-fire collapsed. Israel’s currency ended the week little changed at 3.4284 per dollar.

Euro Breach

The euro fell below $1.35, crossing what’s seen by some dealers as the dividing line between success and failure for the European Central Bank’s attempts to boost growth. The ECB last month became the first major central bank to cut the deposit rate to below zero while lowering the benchmark refinancing rate to a record 0.15 percent. ECB President Mario Draghi said July 14 currency appreciation is “a risk to the sustainability of the recovery.”

Traders speculated so-called barrier options used to protect trading positions had been in place to shield investors against a decline to that level. In simple barrier euro-dollar options contacts trading, a notional value of 466.4 million euros ($630 million) changed hands on July 16, the most since June 26, followed by 429 million euro the next day, according to data compiled by Bloomberg. The average of the past month is 168 million euros.

‘Dovish Communication’

The dollar rose this week as Fed Chair Janet Yellen told lawmakers borrowing costs may rise sooner than markets expect should the labor market continue to improve faster than anticipated. St. Louis Fed President James Bullard said July 17 the central bank may have to raise rates more quickly than planned as unemployment falls and inflation quickens.

The cost of living increased 0.3 percent last month, according to the median forecast in a Bloomberg survey, after a 0.4 percent rise in May that was the biggest since February 2013, according to Labor Department data. U.S. payrolls added 288,000 in June, the fifth monthly gain of at least 200,000, and the jobless rate fell to a six-year low.

“Any further upside could complicate the Fed’s delicate process of credibly maintaining its dovish communication while shifting to a more wholly data dependent approach,” Brian Daingerfield, currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a research note of next week’s CPI data. “This shift to data dependence is likely a USD positive development and may be coming perhaps as soon as the September FOMC decision.”

The Federal Open Market Committee has kept the benchmark interest rate at a record zero to 0.25 percent since December 2008. Traders are betting there’s about a 74 percent chance policy makers will raise the rate by September 2015, fed funds futures data compiled by Bloomberg show.

Before it's here, it's on the Bloomberg Terminal.