Dollar Reaches 12-Year High Versus Yen as Central Banks Diverge

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The dollar rallied to a 12-year high against the yen as the Federal Reserve moves closer to raising interest rates this year while Japanese and European policy makers embrace monetary stimulus.

The greenback snapped a three-day loss versus the euro as a report showed U.S. manufacturing expanded more than forecast last month. The European Central Bank, which plans to front-load its bond-buying stimulus, holds a policy meeting June 3. The euro briefly trimmed losses as Greece’s creditors met in Berlin.

“The market’s confidence in owning the U.S. dollar is growing,” said Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York. Versus the euro area, “the growth differential, the policy differential are there, and they continue to be emphasized as a dollar plus.”

The dollar gained 0.5 percent to 124.77 yen as of 5 p.m. New York time, reaching the highest level since 2002. The U.S. currency appreciated 0.5 percent to $1.0927 per euro.

The Fed is looking to raise borrowing costs later this year after holding interest rates at virtually zero since late 2008. Interest rates will “crawl” higher, Fed Vice Chairman Stanley Fischer said Monday.

Central Banks

By contrast, European Central Bank President Mario Draghi may this week elaborate on plans to accelerate its stimulatory bond purchases before a seasonal lull in liquidity. The ECB is committed to buying debt through at least September 2016. The Bank of Japan is buying 80 trillion yen ($640 billion) of government bonds a year.

“We’re still seeing that residual expectation that a Fed move later this year -- whenever that occurs -- is still going to be positive for the dollar,” Robert Sinche, a strategist at Amherst Pierpont Securities LLC in Stamford, Connecticut, said in a phone interview.

The Institute for Supply Management’s factory index rose to a three-month high of 52.8 from 51.5 in April, figures from the Tempe, Arizona-based group showed Monday. The median projection of economists in a Bloomberg survey called for a reading of 52.

Divergence “is a big part of the reason why the market is bullish on the dollar and I would expect continued dollar strength up through until the Fed raises rates,” Greg Anderson, Bank of Montreal’s global head of foreign-exchange strategy, said by phone from New York.

The shared currency has been hampered by Greece’s failure to seal an accord with creditors before payments to the International Monetary Fund due this month. Top level talks were said to be taking place in Berlin on Monday evening with German Chancellor Angela Merkel meeting French President Francois Hollande and European Commission President Jean-Claude Juncker.

The dollar has gained 19 percent during the past 12 months, the best performance among 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The euro is down 6.4 percent, while the yen has lost 4.2 percent.