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Dollar Gains as Fed Sees Improving Economic Data, Damping Stimulus Bets

The dollar gained against the euro and the yen as the Federal Reserve policy makers raised their assessment of the economy as the labor market gathers strength and refrained from more actions to lower borrowing costs.

The Federal Open Market Committee, which met today in Washington, kept the central bank’s benchmark interest rate target unchanged at zero to 0.25 percent, where it’s been since December 2008. “The unemployment rate has declined notably in recent months, but remains elevated,” the central bank said in a statement. The Fed has bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 until June 2011. The yen dropped earlier to the weakest level against the dollar in almost 11 months as the Bank of Japan plans to keep using monetary policy as a tool to tackle deflation.

“Most of what you’ve read in the statement was what it felt like the market was expecting, with acknowledgment of better data, but no change in policy,” said John Shin, senior G- 10 foreign exchange strategist at Bank of America Corp. in New York. “The FOMC didn’t do anything to tilt policy expectations in either direction.”

The dollar strengthened 0.5 percent to $1.3086 at 2:31 p.m. in New York. It rose 0.9 percent to 82.95 yen after reaching an almost 11-month high.

Bernanke’s Views
Sixty-one percent of respondents in a March 9-12 Bloomberg News survey of economists said Fed Chairman Ben S. Bernanke would refrain from any action to expand the Fed’s $2.89 trillion balance sheet this year. In January, 50 percent of those surveyed predicted more bond buying.

Bernanke’s comments in a congressional testimony earlier this month also damped speculation the Fed will introduce another round of asset purchases.

“We have seen some positive developments in the labor market,” Bernanke said in prepared testimony to the House Financial Services Committee in Washington. He said keeping monetary stimulus is warranted even as the unemployment rate falls.

Retail sales in the U.S. rose in February by the most in five months, reflecting broad-based gains that indicate the world’s largest economy is picking up even as gasoline costs climb. The 1.1 percent advance matched the median forecast of 81 economists surveyed by Bloomberg News and followed a 0.6 percent increase in January that was larger than previously estimated, Commerce Department figures showed today in Washington.

Economic Data
It followed data on March 9 that showed nonfarm payrolls increased by 227,000 in February, marking best six months of job gains since 2006, after rising by a revised 284,000 the prior month. The unemployment rate held at a three-year low of 8.3 percent.

Central-bank officials at their Jan. 25 meeting kept open the option of a third round of bond purchases in case the economy weakens or inflation falls too low. The Dollar Index fell 0.4 percent after the Fed’s last meeting, when Bernanke said that policy makers were considering additional asset purchases to boost growth.

The yen weakened earlier after Bank of Japan Governor Masaaki Shirakawa indicated the central bank will keep using monetary policy as a tool to tackle deflation.

Shirakawa and his board members kept the benchmark interest rate between zero and 0.1 percent, the central bank said in a statement today. Policy makers left the bank’s asset-purchase fund at 30 trillion yen ($360 billion) after unexpectedly boosting bond buying by 10 trillion yen at the Feb. 14 meeting. The measures contributed to weakening the yen and helped boost stocks, Shirakawa told reporters in Tokyo.

The dollar may strengthen to 85 yen by the middle of this year as the greenback’s 100-day moving average rose above its 200-day moving average, forming a so-called golden cross, said Koji Fukaya, Credit Suisse’s chief currency strategist in Tokyo.

Implied volatility of three-month options on the dollar-yen currency pair declined to 10.86 percent, according to data compiled by Bloomberg. It advanced to 11.21 percent yesterday, the most since Sept. 30. The implied volatility of Group of Seven currencies fell to 10.25 percent from 10.38 percent yesterday, according to the JPMorgan G7 Volatility Index.