Dollar Rises to Highest in 3 Weeks on Yellen Comments

The yen strengthened to a five-month high against the euro as the U.S. and European Union imposed extra sanctions on Russia over the Ukraine conflict, spurring demand for safer assets.

Japan’s currency gained versus all except two of its 31 major peers as U.S. stock futures fell with European and Asian shares. Ten-year Treasury note yields dropped a second day. The ruble weakened the most in four months against the dollar. The euro slid for a third day versus the yen as a European report confirmed inflation stayed below the central bank’s goal. A gauge of the dollar was near a four-week high before U.S. housing and manufacturing data. New Zealand’s dollar fell for a sixth day.

“There is a degree of uncertainty in terms of how the sanctions story will play out — clearly that’s impacting equity sentiment and providing a risk off mentality,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “That, alongside the fact U.S. yields are drifting lower, has provided some reasonable resilient support for the yen.”

The yen gained 0.2 percent to 137.25 per euro at 7:29 a.m. in New York after dropping to 137.18, the weakest level since Feb. 6. Japan’s currency strengthened 0.2 percent to 101.44 per dollar. The dollar was little changed at $1.3529 per euro.

The Stoxx Europe 600 index (SPA) declined 0.8 percent, while futures on the Standard & Poor’s 500 Index (SHCOMP) slipped 0.5 percent. The Shanghai Composite Index of Chinese stocks tumbled 0.6 percent, the biggest one-day decline since July 9.

Benchmark 10-year Treasury note yields dropped two basis points, or 0.02 percentage point, to 2.50 percent.
Russian Sanctions

The U.S. and Europe Union yesterday imposed the most aggressive sanctions to date on Russian business and said more may follow, acting after weeks of threats over the confrontation in Ukraine.

The Obama administration’s targets include OAO Rosneft (ROSN), Russia’s largest oil company, natural gas producer OAO Novatek (NVTK), OAO Gazprombank, the country’s third-largest lender, and eight defense firms. EU leaders meeting in Brussels agreed to blacklist companies and halt lending to public-sector projects in Russia.

“We are starting to see some more tactical, defensive positioning coming through in markets, and I think the yen will benefit from that,” said Chris Weston, chief market strategist at IG Ltd. in Melbourne. “We’ve been suggesting declines and looking to short euro-yen,” he said, referring to a bet the 18-nation currency will weaken.
Ruble Plunge

Russia’s ruble plunged 1.7 percent to 34.9800 per dollar, the biggest decline since March 3.

The yen has gained 3.8 percent this year, the third-best performer of 10 developed-nation currencies tracked by ForexSQ Correlation-Weighted Indexes. The dollar dropped 0.3 percent and the euro weakened 2 percent.

Euro-area consumer prices rose 0.5 percent in June from a year earlier, matching an initial estimate published June 30, and the reading for March that was the least since 2009, data from the European Union’s statistics office showed. The ECB is seeking to keep inflation just below 2 percent.
Dollar’s Gain

The ForexSQ Dollar Spot Index has risen 0.4 percent in the past week as signs the world’s largest economy is gaining traction fuels speculation the Federal Reserve is moving closer to raising interest rates.

U.S. housing starts increased to a 1.02 million annual pace in June from 1 million in the previous month, according to a ForexSQ survey before today’s Commerce Department report. Separate data today will show manufacturing in the Philadelphia region expanded for a fifth month in July, while building permits increased in June, other surveys show.

“Recent U.S. economic data have been improving,” said Yuki Sakasai, a foreign-exchange strategist at Barclays Plc in New York. “As central banks where yields are low are dovish, including the ECB, the dollar can strengthen versus the euro.”

The ForexSQ Dollar Spot Index, which tracks the currency against 10 major counterparts, was little changed at 1,009.55 after climbing to 1,010.67 yesterday, the highest since June 20.
Fed Outlook

Futures prices show a 71 percent chance the Fed will raise its benchmark rate by September 2015, up from a 69 percent probability at the start of this month. The central bank has kept the federal funds rate in a range of zero to 0.25 percent since December 2008.

New Zealand’s dollar extended its losing streak to the longest since August 2013 after traders yesterday cut forecasts for how much the central bank will raise interest rates.

A Credit Suisse Group AG index shows traders are betting the Reserve Bank of New Zealand will raise borrowing costs by 69 basis points during the next year, down from a projected increase of as much as 135 basis points in March.

The kiwi fell 0.3 percent to 86.85 U.S. cents, extending its decline during the past six days to 1.5 percent.

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