Dollar Weakens as Stocks Advance Before Federal Reserve Meeting

Bloomberg

The dollar fell against the majority of its most-traded counterparts as stocks and commodities rose, reducing demand for a refuge as the Federal Reserve begins a two-day policy meeting.

The greenback weakened to the lowest versus the euro in almost a week. The shared currency rose as European leaders said a Greek default can be avoided amid speculation Prime Minister George Papandreou will win a confidence vote today. China’s yuan traded at almost a 17-year high on speculation policy makers will tolerate appreciation to tame inflation.

“Some of the fears of broader global, economic and financial disruption as a result of a Greek default are priced out a little bit, and market participants are tiptoeing back into risk,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “Bond yields are up, equities are doing relatively well and commodities are generally higher, so that has been weighing on the dollar broadly.”

The dollar depreciated 0.5 percent to $1.4380 per euro at 10:54 a.m. in New York after reaching $1.4389, the weakest since June 15. The U.S. currency slipped 0.2 percent to 80.12 yen, from 80.25 yesterday. The euro was 0.4 percent stronger at 115.22 yen.

“The play leading into the confidence vote has been to buy euros; the yes vote is priced in now,” Gallo said.

Home Sales Fall

The greenback remained weaker versus most peers as National Association of Realtors data showed sales of existing homes in the U.S. decreased in May to the lowest level in six months. Treasuries fell, sending the benchmark 10-year note yield up four basis points, or 0.04 percentage point, to 2.99 percent.

All 87 economists in a Bloomberg News survey forecast the Federal Open Market Committee will keep the benchmark interest rate at zero to 0.25 percent tomorrow, where it’s been since December 2008. Futures show the likelihood the central bank will increase its target rate by March 2012 dropped to 21 percent from 30 percent a month ago.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.5 percent to 74.679 and touched 74.652, the lowest level since June 15, from 75.029.

Purchases of existing U.S. homes fell 3.8 percent to a 4.81 million annual pace last month, in line with estimates, according to the realtors association.

Fed Vice Chairman Janet Yellen said June 9 that a “long, drawn-out recovery” was likely for the U.S. housing market. “For its part, the Federal Reserve will continue to use its policy tools to support the economic recovery,” she said.

Stocks, Commodities

The Standard & Poor’s 500 Index gained 1 percent, and the MSCI World Index climbed 1.4 percent. The S&P GSCI Index of commodities increased for the first time in five days, gaining 0.6 percent.

Investors expect the Fed to add 13 basis points to its benchmark rate in the next 12 months according to a Credit Suisse Group AG index based on overnight swaps. A separate survey shows an expected six basis-point cut to the 4.75 percent rate in Australia.

Australia’s dollar declined after the nation’s central bank said domestic data had not added “any urgency” to the need for policy adjustment and it may be “prudent” to keep rates unchanged, according to minutes released today of a June 7 policy meeting.

The Aussie fell 0.3 percent against the euro to A$1.3552. It gained 0.2 percent versus the greenback to $1.0605.

Papandreou Vote

The euro rose versus most major currencies as Greece’s Papandreou seeks to secure multiparty support for his government’s austerity measures, a condition for receiving aid needed to avoid a default. He called for the confidence vote last week after opposition parties rejected pleas for national consensus and the prime minister’s handling of the crisis led to defections from his party.

Greece needs parliamentary approval of a 78 billion-euro ($112 billion) package of budget cuts and asset sales to ensure the payment of a fifth loan under last year’s 110 billion-euro bailout.

The Swiss franc slipped versus the shared currency, losing 0.1 percent to 1.2121, from 1.2106 yesterday. It touched a record high of 1.1947 on June 16.

The euro’s gains were capped after a report today showed investor confidence in Germany, data that aims to predict developments six months in advance, slumped to the lowest in 2 1/2 years this month.

Pound Declines

The pound weakened 0.4 percent to 88.61 pence per euro and rose 0.1 percent to $1.6220 as Bank of England Markets Director Paul Fisher said further bond purchases to stimulate the economy are possible.

The People’s Bank of China set the yuan’s reference rate stronger for a third day, and the currency gained as much as 0.2 percent to 6.4649 per dollar, compared with 6.4636 on June 17. China is likely to continue to raise its banks’ reserve- requirement ratios to curb inflation, Market News International reported yesterday, citing an unidentified person closer to the National Development and Reform Commission.

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