Dollar Rises to 4-Month High as GDP Tops Forecast

July 30, 2014

San Francisco (July 30)  The dollar rose to a four-month high after the economy grew more than forecast in the second quarter while the Federal Reserve trimmed the monthly pace of bond purchases for a sixth consecutive meeting.

The Bloomberg Dollar Spot Index erased a loss for the year as the yield spread between Treasury two-year notes and similar maturity German bunds reached the most in more than seven years. The euro slid to an eight-month low as German inflation slowed. The ruble gained even amid toughened sanctions. Fed officials led by Chair Janet Yellen are stepping up a debate over when to raise interest rates for the first time since 2006.

“The biggest impact today has been the gross domestic product report, and those have been positive, and I think the strength in the dollar is really because of that,” Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York, said by phone. The Fed decision “reiterates everything Yellen has been saying -- going forward, policy remains data dependent.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.4 percent to 1,020.38 at 3:36 p.m. New York time after touching 1,021.96, the highest since March 20. The gauge has gained 1.7 percent this month to wipe out a 1.6 percent drop in the first half of the year.

The euro fell 0.1 percent to $1.3395 after reaching $1.3367, the lowest since Nov. 12. The dollar rose 0.7 percent to 102.84 yen, a ninth day of gains that would be the longest winning streak since March 2005. Japan’s currency fell 0.6 percent to 137.75 per euro.

Harajli recommended “going long dollar against the euro and yen, as it seems that data in the U.S. is starting to pick up.” A long is a bet an asset will increase in value.

Winners, Losers

The pesos of Colombia and Chile led declines against the dollar among 24 developing-economy currencies, each dropping more than 1.1 percent. The Chinese yuan added 0.2 percent and the Indian rupee added 0.1 percent, the most among gainers.

A Bloomberg gauge with equal weightings of the dollar’s 20 most-traded emerging-market peers dropped 0.4 percent to 91.9566, the least since June 17. The five-day skid is the longest since an 11-day losing streak ending Jan. 27.

The ruble rose even as EU governments agreed on sanctions against Russia yesterday that bar state-owned banks from selling shares or bonds in Europe, restrict the export of equipment to modernize the oil industry and bar export of equipment with military uses. The U.S. added penalties against three Russian banks and a state-owned shipbuilder.

The ruble strengthened 0.6 percent to 41.0340 versus the central bank’s target basket of dollar and euros after sliding 2.4 percent over the previous four days.

Krona Slides

The krona dropped as Sweden’s GDP (SWGDPAQQ) grew a quarterly 0.2 percent in the three months through June after contracting 0.1 percent in the first quarter, Statistics Sweden said today, citing preliminary data. The economy was seen expanding 0.6 percent in a Bloomberg survey.

Sweden’s currency depreciated as much as 0.7 percent to 6.9052 per dollar, its weakest level since July 2012.

JPMorgan Chase & Co.’s Global FX Volatility Index rose to 6.06 percent, the highest since June 5. That’s up from an all-time low on a closing basis of 5.29 percent on July 3. The index had tumbled from a high for the year of 8.98 on Feb. 3 and a peak of 27 percent during the worst of the global financial crisis in October 2008.

Yield Gap

U.S. two-year note yields gained two basis points, or 0.02 percentage point, to 0.56 percent after touching 0.58 percent, the highest in more than three years. That extended the gap with German debt to 52 basis points, the most since June 2007.

Shorter-term interest rates, such as two-year yields, are the most sensitive to changes in central bank rates and tend to correlate with changes in currency prices.

The jump in yields is “giving the USD a bid,” Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, said in an e-mail. “The primary impact is on the most resilient currencies versus U.S. to date,” which include the yen, Australian dollar and British pound, he said.

The euro extended a decline as inflation in Germany, the bloc’s largest economy, calculated using a harmonized European Union method, slowed to 0.8 percent in July from 1 percent in June, the Federal Statistics Office in Wiesbaden said today. That matched the median estimate of economists surveyed by Bloomberg News.

Taper Continues

The dollar advanced as GDP rose at a 4 percent annualized rate after shrinking 2.1 percent from January through March, Commerce Department figures showed today in Washington. The median forecast of 80 economists surveyed by Bloomberg called for a 3 percent advance.

“The market got a little excited about the GDP -- we’re going to have to see what Q3 looks like to see what the growth trend is,” Brad Bechtel, managing director of Faros Trading LLC in Stamford, Connecticut, said in a phone interview.

The Federal Open Market Committee tapered monthly bond buying to $25 billion in its sixth consecutive $10 billion cut, staying on pace to end the purchase program in October. Policy makers repeated they’re likely to reduce bond buying in “further measured steps” and to keep interest rates low for a “considerable time” after ending purchases.

Since meeting in mid-June, the committee has come closer to achieving its goals for stable prices and full employment. Employers added 288,000 jobs last month, helping push down unemployment to 6.1 percent, the lowest in almost six years. The Fed’s preferred inflation gauge rose 1.8 percent in May from a year earlier, at almost its 2 percent target.

“They are giving strong indications for the first time that they are moving towards hitting both targets,” Steven Englander, the head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote today in a client note about the FOMC statement. “The economic assessment will be given bigger prominence as time goes on and we will be back to USD buying.”

Source:  Bloomberg

Silver Phoenix Twitter                 Silver Phoenix on Facebook