Dollar Advances as Federal Reserve May Signal Stimulus Exit

By Ron Harui

Sept. 21 (Bloomberg) -- The dollar advanced against the euro and the yen on speculation U.S. policy makers will this week signal they may withdraw economic stimulus measures, boosting the appeal of the nation’s assets.

The dollar reached a two-week high against the pound and rose versus 13 of the 16 major currencies before a U.S. report economists said will show an index of leading indicators gained a fifth month, backing the case for the Federal Reserve to wean the economy off support. The yen was near a three-week low versus the euro after Finance Minister Hirohisa Fujii edged away from comments last week that were interpreted to mean he would let the yen rise.

“There’s a risk the FOMC will indicate at some point they will start withdrawing their stimulus to the economy,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s largest lender by assets. “The catalyst for the dollar strengthening on a sustained basis is likely to come from the FOMC.”

The dollar strengthened to $1.4673 per euro as of 6:26 a.m. in London from $1.4712 in New York on Sept. 18. The greenback jumped to 91.90 per dollar from 91.29. The U.S. currency rose to $1.6203 per pound from $1.6271, after earlier advancing to $1.6197, the highest level since Sept. 2.

The yen was at 134.91 per euro from 134.33 last week. It declined to 134.77 on Sept. 17, the lowest level since Aug. 28.

Dollar Index

The Dollar Index, which the ICE uses to track the dollar against the currencies of six major U.S. trading partners, rose 0.4 percent to 76.701.

Foreign-exchange trading may be more subdued than usual in Asian trading hours today because of public holidays in Japan, said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney.

The Fed will keep its target rate for overnight loans in a range of zero to 0.25 percent at its two-day policy meeting starting tomorrow, according to all 91 economists surveyed by Bloomberg News. Chairman Ben S. Bernanke said in Washington on Sept. 15 that the worst U.S. recession since the 1930s has probably ended.

“That’s why there might be a little bit of nervousness going into the FOMC if they start signaling any potential unwind of quantitative easing,” Tony Morriss, senior markets strategist in Sydney at Australia & New Zealand Banking Group Ltd., said in a Bloomberg Television interview. “There is a bit of risk over the next couple of days of the dollar starting to recover a little bit of ground.”

The Conference Board’s gauge of the U.S. economic outlook for the next three to six months rose 0.7 percent in August, after a 0.6 percent gain in July, a Bloomberg survey showed before the New York-based group releases the report today.

Yen to Weaken

The world’s biggest banks say the Japanese currency is likely to weaken.

While the yen gained against all but one of the 16 most- actively traded currencies since early August as the Democratic Party of Japan became the likely winner in national elections, forecasters say it will decline 5.7 percent against the dollar and 1.2 percent versus the euro by year-end. The economy is too weak to support a stronger rate, based on the median estimate in a Bloomberg survey.

Japan will be the only Group-of-10 nation that won’t raise borrowing costs in 2010, keeping its benchmark interest rate at a record low 0.1 percent, the survey showed. The economy will expand 0.8 percent next year after contracting 6 percent in 2009, according to median forecasts, putting assets in the world’s second-biggest economy at a disadvantage to those in countries with higher borrowing costs.

‘Deteriorated Significantly’

“Everyone is seemingly buying the yen, which I think is ridiculous,” said Jim O’Neill, head of global economic research at Goldman Sachs Group Inc. in London. “The true underlying fundamentals for the yen in my book have deteriorated significantly.”

New York-based Goldman Sachs, which earned more than $100 million from trading for a record 46 days last quarter, predicts the yen will weaken to 98 per dollar and 142 per euro by the end of the year.

The pound may weaken further against the dollar and the euro on speculation the Bank of England will keep borrowing costs low, according to BNP Paribas SA.

BOE Governor Mervyn King last week told lawmakers in London that cutting the deposit rate paid to financial institutions is “something we’re looking at.” Banks are currently paid 0.5 percent on the deposits. While the U.K. central bank is boosting its reserves by buying 175 billion pounds ($284 billion) of bonds through so-called quantitative easing, King said he doesn’t want it to go too far.

‘Will be hit’

“Sterling will be hit by the BOE keeping interest rates low, continuing to purchase gilts in the open market via an expansion of its balance sheet,” analysts led by Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas, wrote in a research note dated yesterday. “We have revised our pound projections lower.”

BNP now expects the pound to decline to $1.57 by the end of this year, compared with $1.53 previously. The French bank also forecasts the pound to fall to 98 pence per euro by year-end, versus a prior prediction of 88 pence.

The pound dropped to 90.53 pence per euro from 90.40 pence on Sept. 18, after earlier touching 90.67 pence, the lowest level since Apr. 24.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net