Dollar Strengthens on Prospects for Policy Divergence

The dollar rose to the strongest in almost seven years against the yen as the Federal Reserve moves toward interest-rate increases while the Bank of Japan adds to monetary stimulus.

The U.S. currency appreciated versus all of its 16 major counterparts as a measure of manufacturing rose more than estimated. The euro fell to a two-year low against the greenback before the European Central Bank meets this week. Australia’s dollar had its biggest decline in more than two weeks before policy makers discuss monetary policy. Brazil’s real and Canada’s dollar slid.

“The environment in the U.S. is very favorable to investment,” Camilla Sutton, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto, said by phone. “The broad trend is one where the U.S. dollar strengthens into year-end and into 2015.”

The dollar rose 1.5 percent to 114.05 yen at 5 p.m. New York time and reached 114.22 yen, the highest since December 2007. The U.S. currency gained 0.3 percent to $1.2482 per euro after appreciating to $1.2440, the strongest level since August 2012. The yen slipped 1.2 percent to 142.35 per euro. Japan’s financial markets were shut for a holiday.

A JPMorgan Chase & Co. gauge of global currency volatility climbed to 8.24 percent, its highest level since Oct. 16.

Real Drops

Brazil’s real fell a second day after a report last week showed the nation’s budget deficit widened to 69.4 billion reais in September, more than twice the median forecast in a Bloomberg survey of six analysts. The shortfall was the biggest since the series of data began in December 2001. The currency lost 0.7 percent to 2.4953.

The Australian dollar slipped versus most of its 31 major peers as traders are pricing in little prospect of an increase in the cash rate in 2015 and no chance Reserve Bank of Australia Governor Glenn Stevens and his board will move the benchmark interest rate from 2.5 percent.

The Aussie fell 1.3 percent to 86.81 U.S. cents.

Pacific Investment Management Co. is “actively overweight” the dollar against the Aussie, the euro and the yen, according to a note to clients on its website.

Dollar Trend

“After a decade of weakness, the U.S. dollar is strengthening,” chief investment officers Scott Mather, Mark Kiesel and Mihir Worah wrote. “The lack of synchronicity in the global economy will create some of the most compelling investment opportunities over the next year.”

Canada’s dollar fell 0.8 percent to C$1.1359 per U.S. dollar, reaching almost the lowest since June 2009. Crude oil, the country’s largest export, slid to the least in two years and the central-bank governor said low interest rates were still needed to drive growth.

Japan’s currency fell against all of its 31 major peers after the central bank said on Oct. 31 it plans to expand the monetary base by 80 trillion yen ($703 billion) a year, up from a previous 60 trillion yen to 70 trillion yen.

“In two days of actions, the yen has depreciated so massively, it’s an indication the market wasn’t positioned for this at all, and is now chasing the trend,” Paresh Upadhyaya, Boston-based director of currency strategy at Pioneer Investment Management Inc., said in a phone interview.

Pension Shift

The same day, Japanese officials unveiled reforms to the Government Pension Investment Fund that increased allocations to stocks and overseas assets by more than expected. Japan’s public retirement-savings manager will put half its holdings in local and foreign stocks and reduce domestic bonds to 35 percent of assets from 60 percent.

The Fed finished a program of bond buying on schedule last month, taking the U.S. closer to its first interest-rate increase in eight years. The central bank highlighted “solid” job gains and a falling unemployment rate in its statement on Oct. 29, while pledging to maintain borrowing costs at a record low for a “considerable time.”

The U.S. Institute for Supply Management’s manufacturing index rose to 59 last month, exceeding forecasts for a decline to 56.1. Readings greater than 50 indicate growth. A report on Nov. 7 is forecast to show the unemployment rate remained at 5.9 percent, the lowest level since July 2008.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.7 percent to 1,088.07, the highest close since April 2009. It advanced 0.9 percent in October, its fourth consecutive monthly gain, the longest stretch since the period through March 2013.

“The U.S. is accelerating while the rest of the world, particularly Japan and the euro zone, is decelerating,” said Mark McCormick, a foreign-exchange strategist in New York at Credit Agricole SA. “Macro investors really are hoping for this divergence story to play out because that’s where relative value can be generated.”

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