Dollar Climbs on Speculation Fed to Halt Cuts, Losses Overdone
May 12 (Bloomberg) -- The dollar rose against the yen for the first time in six days as traders speculated the Federal Reserve won't cut interest rates next month.
The currency increased from a three-week low versus the yen as a chart traders use to predict price movements signaled last week's 2.4 percent decline was too large to be sustained. The yen dropped against the South African rand and the Brazilian real as speculation the worst of the financial crisis is over led investors to buy higher-yielding assets funded in Japan.
``It's not going to be an express train toward a much stronger dollar, but it will trade stronger slowly and gradually,'' said Jeff Gladstein, global head of foreign- exchange trading at AIG Financial Products in Wilton, Connecticut. ``The U.S. is not going to have as deep a downturn as everyone initially portrayed.''
The dollar climbed 0.8 percent to 103.66 yen at 11:01 a.m. in New York, from 102.87 on May 9. It was the biggest gain since May 2. The euro increased 0.9 percent to 160.68 yen, from 159.21 yen, the largest one-day advance since April 16. The dollar traded at $1.5496 per euro, compared with $1.5482.
Traders in the futures market have turned bullish on the dollar versus the euro for the first time since December 2005. The difference in the number of wagers by hedge funds and other large speculators on an advance in the greenback versus the euro, known as net longs, was 21,315 on April 29, figures from the Commodity Futures Trading Commission in Washington show. There were net-short positions in each of the previous 123 weeks. Net longs were trimmed to 12,512 on May 6.
Dollar's Rally
The U.S. currency has rallied 3.5 percent since touching the all-time low of $1.6019 per euro on April 22. The dollar gained momentum late last month after Fed policy makers said ``substantial'' rate cuts since September would help foster growth. The dollar got a further boost from a Labor Department report showing U.S. employers eliminated fewer jobs in April than economists forecast.
The pound increased from a two-week low against the euro and climbed versus the dollar after a surge in U.K. producer prices led traders to reduce bets that the Bank of England will cut its 5 percent target lending rate next month. Sterling rose 0.2 percent to 79.05 pence per euro and 0.3 percent to $1.9605.
South Africa's rand strengthened against all of the major currencies on speculation Johannesburg-based MTN Group Ltd., Africa's biggest mobile-phone operator, may soon be bought by a foreign company. The rand increased 1 percent to 7.6535 against the dollar and 1.2 percent to 11.83 per euro.
Weaker Yen
The yen dropped 2 percent versus the rand, 1.5 percent against the real and 1.3 percent against Norway's krone on speculation investors will increase carry trades, in which they get funds in a country with low borrowing costs and invest where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 11.75 percent in Brazil, 11.5 percent in South Africa and 5.5 percent in Norway.
The U.S. currency's 14-day stochastic oscillator versus the yen was 8.1 on May 9 and 35.67 today, according to data compiled by Bloomberg. A level below 20 suggests the currency has fallen too fast. The chart measures the closing price of a currency relative to its highs and lows during a particular period to gauge whether it will rise or fall.
Futures on the Chicago Board of Trade show an 84 percent chance the Fed will hold its target lending rate at 2 percent at its next meeting on June 25, up from 82 percent odds on May 9. The balance of bets is for a cut of a quarter-percentage point. There's a 10 percent chance of an increase to 2.25 percent in September. The central bank has lowered the fed funds target 3.25 percentage points since September.
Fed Rate Outlook
``It's doubtful that the Fed can afford to cut more,'' said Benedikt Germanier, an analyst at UBS AG in Stamford, Connecticut, in an interview on Bloomberg Television. ``We are short on the euro-dollar. Our three-month forecast is $1.47.''
Chicago Fed President Charles Evans said in a speech today in Illinois that the central bank's current interest-rate stance is ``appropriate.''
The Dollar Index traded on ICE futures in New York, which tracks the dollar against currencies of six trading partners, rose to 73.214 today, from 73.050 on May 9. It dropped to a record of 70.698 on March 17. The dollar strengthened 0.6 percent to 1.0477 versus the Swiss franc.
The U.S. currency will increase to $1.50 per euro and trade at 102 yen by Dec. 31, according to the median forecast of 40 economists surveyed by Bloomberg News.
A Commerce Department report tomorrow will probably show U.S. retail sales fell 0.2 percent in April, following a 0.2 percent gain the prior month, according to the median forecast of 65 economists in a separate Bloomberg survey.
