Dollar Reaches 3-Week High as GDP Backs Fed; Yen Falls

The dollar touched a three-week high against its major counterparts as the U.S. economy expanded more than forecast in the third quarter to confirm the Federal Reserve’s decision yesterday to end its bond-buying program.

The yen declined after the Nikkei newspaper reported Japan’s Government Pension Investment Fund will raise its allocation of domestic stock to 25 percent and lower Japanese debt to 35 percent. The euro added to its biggest annual drop since 2005 before a report tomorrow that analysts said will show inflation remained below the European Central Bank’s target. Brazil’s real rallied after an unexpected rate increase, while Norway’s krone reached the lowest since 2009. The ruble soared.

“The real theme that’s driving markets is divergence -- we received new information from the Fed yesterday and the dollar rally is back in play,” said Mark McCormick, a foreign-exchange strategist in New York at Credit Agricole SA. “For many years, the GPIF has had a conservative approach to investing,” and the reform will lead to outflows from Japan into overseas debt, McCormick said.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, reached 1,073.85, the strongest since Oct. 6, before trading up 0.1 percent to 1,070.28 at 5 p.m. New York time. It gained 0.6 percent yesterday and was headed for a second weekly increase.

The yen fell 0.3 percent to 109.21 per dollar after touching 109.47, the weakest since Oct. 6. Japan’s currency fell 0.1 percent to 137.75 per euro. The dollar added 0.2 percent to $1.2613 per euro after appreciating to $1.2548, also the strongest level since Oct. 6.

Real, Krone

Only one of 54 economists surveyed by Bloomberg correctly forecast the Brazil central bank’s decision yesterday to raise the target lending rate by a quarter-percentage point to 11.25 percent. The monetary authority said in its statement that the move would reduce the cost of ensuring an improved inflation outlook in 2015 and 2016.

Brazil’s real strengthened 2.4 percent to 2.4026 per U.S. dollar, the biggest advance among 16 major counterparts tracked by Bloomberg.

Norway’s krone dipped to 6.7431 per dollar, the weakest since April 2009, before trading little changed at 6.7033. It slid yesterday as reports showed retail sales unexpectedly contracted in September while the unemployment rate rose in August more than economists predicted.

The Russian currency jumped as much as 5.1 percent, the biggest increase since the Moscow Exchange started publishing data 11 years ago, on speculation policy makers will adopt a more aggressive intervention strategy at a meeting tomorrow in which they could also raise interest rates. The ruble gained 3.6 percent to 41.6445.

BOJ Meeting

The yen dropped before details of the $1.2 trillion pension fund’s changes are announced tomorrow, according to Nikkei.

The Bank of Japan meets also meets tomorrow, with three of 32 economists surveyed by Bloomberg News this month predicting the central bank would expand asset purchases, 19 forecasting action at a later date, and 10 not foreseeing any increase. The central bank buys about 7 trillion yen of bonds each month as it targets inflation of 2 percent.

The Federal Open Market Committee dismissed recent turmoil in global markets yesterday as it focused instead on “solid” U.S. employment gains. It said the labor market has strengthened enough to withstand an end to its quantitative-easing program and downplayed risks posed by slowing inflation.

GDP Growth

The dollar gained earlier as the U.S. economy grew at a 3.5 percent annualized rate in the three months ended September after a 4.6 percent gain in the second quarter, Commerce Department figures showed. The median forecast of 87 economists surveyed by Bloomberg called for a 3 percent advance.

“The combination of the market’s reaction to the Fed policy announcement and now the data is supportive of a shift of focus from the end of quantitative easing to the next policy move,” Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., said in a phone interview.

In Europe, consumer prices rose an annualized 0.4 percent in October, the European Union’s statistics office in Luxembourg will say tomorrow, according to the median estimate of economists in a Bloomberg News survey.

The prospect of tighter policy in the U.S. just as central banks including the ECB and Sweden’s Riksbank loosen theirs to avert deflation has propelled the U.S. currency higher. The dollar has climbed versus all of its 16 major counterparts this year. Its gains for 2014 range from 0.6 percent versus the won to 12 percent against Sweden’s krona.

The ECB’s stimulus contributed to an 8.2 percent depreciation of the euro against the greenback this year, set for the biggest annual decline since it slumped 13 percent in 2005. The common currency will probably drop to $1.20 in the third quarter of 2015, said CBA’s Dragicevich.

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