Dollar Advances to 8-Month High Versus Euro on Fed, ECB

The dollar advanced to the highest in eight months versus the euro as borrowing costs and monetary policies between the two economies diverge.

Australia’s dollar rose to the most since November against the shared currency after the central bank chief said he was content with monetary policy. Brazil’s real gained against all 16 major peers as swap rates dropped to an 11-month low. Russia’s ruble posted the biggest gain in almost a month. The annual increase in U.S. consumer prices was unchanged as the Federal Reserve weighs the pace of tightening monetary policy while the European Central Bank has offered unprecedented stimulus.

“The ECB policy supports a weaker currency, so therefore I would expect euro will continue this pace of moving lower,” Lennon Sweeting, a San Francisco-based dealer at the broker and payment provider USForex Inc., said in a phone interview. “Toward year-end we should be settling in somewhere around $1.30, and a more aggressive forecast maybe even $1.28.”

The dollar appreciated 0.4 percent to 1.3466 per euro at 5 p.m. New York time, after touching $1.3459, the strongest level since Nov. 21. The euro fell 0.4 percent to 136.63 yen and reached 136.59, the least since Feb. 5. The Japanese currency fell 0.1 percent to 101.46 per dollar.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose 0.1 percent to 1,010.83 after advancing to 1,011.76, the highest level since June 18.

Aussie, Real

Australia’s dollar climbed versus most of its 16 major peers after Reserve Bank of Australia Governor Stevens said at a luncheon today in Sydney he was content with policy and stands ready to do more if needed. The currency tumbled 1 percent on July 3 when he said it was “overvalued” by most measures.

The Aussie rose 0.6 percent to A$1.4335 per euro after touching A$1.4312, the strongest level since Nov. 12. It gained 0.2 percent to 93.94 U.S. cents after dropping 0.2 percent yesterday.

The real gained after Brazil’s swap rates dropped as a report indicating slower-than-forecast inflation added to speculation that policy makers will limit further increases in borrowing costs. Policy makers held the target lending rate at 11 percent for a second straight meeting on July 16 after nine consecutive increases to curb inflation.

The real advanced 0.4 percent to 2.2128 per dollar and touched 2.2077, strongest since July 2.

Ruble Gains

The ruble advanced against all of its 31 major peers even as photographs of debris from a Malaysian jet downed in eastern Ukraine show what seem to be telltale holes left by a missile strike on the Boeing Co. 777, defense experts said.

EU foreign ministers in Brussels were debating how to deliver on the bloc’s commitment to expand a 72-person blacklist. U.K. Foreign Secretary Philip Hammond said an arms embargo may be considered against Russia, which Ukraine said had massed as many as 41,000 troops on its border.

“The Ukraine plane situation is troubling for the euro-zone economic outlook, or at least it could be,” Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, said by phone from New York. “More intense sanctions are likely and those have economic spillover.”

The ruble added 1.1 percent to 47.0907 against the euro and strengthened 0.9 percent versus the central bank’s target basket of dollars and euros to 40.4151 after adding 1.1 percent, the most since June 24.

The ruble has strengthened 2.6 percent since February as the central bank lifted its benchmark interest rate a total of 2 percentage points in March and April and intervened in the foreign-exchange market to meet demand for dollars.

‘Higher Inflation’

The dollar extended gains versus the euro as U.S. consumer price index was up 2.1 percent in June on an annual basis, matching the previous month’s gain. It increased 0.3 percent last month after a 0.4 percent gain in May, matching median forecast of 85 economists surveyed by Bloomberg, figures from the Labor Department showed today in Washington.

The core measure, which excludes volatile food and fuel costs, increased 0.1 percent, less than projected.

“That’s not a data response -- that is a market that’s looking to sell euro,” Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, said by phone from New York. The CPI data were “not much of a surprise, just tiny bit soft on the core. Because of that core reading, yields are down just a little bit.”

European policy makers cut their deposit rate to an unprecedented minus 0.1 percent last month, with President Mario Draghi pledging additional measures if required. They lowered the benchmark rate to a record 0.15 percent.

Yield Difference

The Fed is on pace to finish tapering its bond purchases in October. Traders saw a 45 percent chance the Fed will raise the target rate for overnight bank lending by June 2015, according to futures data compiled by Bloomberg. That’s up from a 40 percent possibility on June 30.

Two-year Treasuries yield about 44 basis points, or 0.44 percentage point, more than similar-maturity German debt, compared with 17 basis points in January.

Treasury two-year yields were at 0.47 percent after touching 0.50 percent, the highest level since July 9. Their 20-day correlation with dollar-yen was 0.64 after touching 0.66 yesterday, indicating the strongest relationship since March 28. Two-year yields are seen by investors as most sensitive to interest-rate expectations, whereas longer maturities are more influenced by the outlook for inflation.

The dollar has appreciated 0.7 percent in the past month, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The yen advanced 1.2 percent, the best performer, while the euro lost 0.4 percent.

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