The Dollar Index rose to a two-week high as investors fled higher-yielding currencies in favor of the relative safety of dollar-denominated assets.
The U.S. currency rose against the majority of its 16 major counterparts before U.S. reports tomorrow that economists said will show durable-goods orders gained and house prices increased as the Federal Reserve may reduce monetary stimulus. Chinese stocks (SHCOMP) fell the most in four years, damping investor interest in riskier currencies. The yield differential between U.S. and German government securities increased to the widest in more than three years.
“There’s broad-based dollar strength,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. “People are rotating out of assets that they overreached for as the grab for yield unwinds. The dollar will be the beneficiary of people looking to unwind liquidity- or carry-fueled trades.”
The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the U.S. currency against those of six trading partners, rose 0.3 percent to 82.524 at 1:36 p.m. in New York after climbing to the highest level since June 5.
The dollar advanced 0.1 percent to $1.3105 per euro after appreciating to the strongest level since June 6. The U.S. currency weakened 0.1 percent to at 97.78 yen. The yen added 0.2 percent to 128.15 per euro.
Deutsche Bank AG’s G10 FX Carry Basket index fell to 112.22, the lowest level since September. It gained 6.8 percent in 2012 after declining the previous two years as weak economic data in the U.S., Japan and the euro region led to speculation that central banks would keep rates low and inject money to boost growth. With those conditions waning, volatility has increased, which is negative for the carry trade because it depends on predictable interest rates across jurisdictions.
JPMorgan Chase & Co.’s Group of Seven Volatility Index, based on currency option premiums, rose to as high as 11.95 percent today, the most since January 2012. The gauge has averaged 8.76 percent in the past year.
Treasuries due in 10 years yielded 0.78 percentage point more than similar maturity German sovereign debt. The spread reached 0.81 on June 21, the biggest premium since April 2010, according to Bloomberg data.
“It signals just how many people were on one side of the boat at once in having an investment strategy based on lower rates for even longer, if not forever,” Kit Juckes, global strategist at Societe Generale SA in London, said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Sara Eisen. “We are making a turning point in U.S. monetary policy and too many of us have the wrong investment.”
The premium for one-year options granting the right to sell the euro against the dollar relative to those allowing for purchases is at 1.91 percentage points, the most bearish since Sept. 13.
“Long-term yields in the U.S. have continued to jump higher over the last week,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “That’s driving some inflows and strength into the U.S. dollar. There’s been a reassessment of the whole liquidity story and what will be the impact on rates across the board.”
The South African rand strengthened against all 16 of its major peers after sovereign bond yields climbed to their highest level on a closing basis in a year. The rand increased 0.6 percent to 10.1011 per dollar.
Sweden’s krona declined versus most of the majority of its most-traded counterparts as the CSI 300 Index of Chinese stocks fell the most in four years, signaling a bear market. The currency dropped 1.5 percent to 6.7740 per dollar after depreciating to the least since Nov. 21. It has tumbled 4.4 percent in the past week.
The Norwegian krone fell against the majority of major currencies, slipping as much as 1.6 percent to 6.1539, the lowest since July 17.
The Dollar Index jumped 1 percent on June 19 when Chairman Ben S. Bernanke said policy makers may begin reducing their quantitative-easing program this year and end it in mid-2014 if the economy is achieving the central bank’s objectives. The Fed purchases $85 billion of bonds each month.
“The fundamental picture for the dollar is clearly positive,” said Marcus Hettinger, a currency strategist at Credit Suisse Group AG in Zurich. “The expectation that the Federal Reserve may start reducing asset purchases leads to higher U.S. yields supporting the dollar.”
Richard Fisher, president of the Fed Bank of Dallas, said investors shouldn’t overreact to the central bank’s plans to reduce the pace of asset purchases, in an interview with the Financial Times published on its website today. This week will see speeches from Bank of Atlanta President Dennis Lockhart, Bank of Richmond President Jeffrey Lacker, Bank of Cleveland President Sandra Pianalto and Bank of San Francisco President John Williams.
U.S. durable-goods orders increased 3 percent in May after rising a revised 3.5 percent the previous month, according to a Bloomberg News survey before tomorrow’s Commerce Department report. The S&P/Case-Shiller index of home values for 20 cities climbed 10.6 percent for the year ended April after a 10.9 percent gain in March that was the biggest since 2006, a separate survey showed.
Trading in over-the-counter foreign-exchange options totaled $28 billion, compared with $62 billion on June 21, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $6.3 billion, the largest share of trades at 23 percent. Euro-dollar options were the second most-actively traded, at $4.1 billion, or 15 percent.
Dollar-yen options trading was 29 percent above the average for the past five Mondays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 84 percent above average.
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