Dollar gains most in 2 months as Bernanke signals bond-buy taper

The dollar rallied the most in two months versus the euro as Federal Reserve Chairman Ben S. Bernanke said the central bank could reduce its bond-buying this year and end it next year if economic improvement continues.

The U.S. currency gained versus a majority of its 16 most-traded peers as Fed policy makers will keep buying bonds at a pace of $85 billion a month and said that risks to the economy have decreased. They also lowered forecasts for the unemployment and inflation rates this year. Europe’s 17-nation currency had reached almost its highest level against the dollar since February and the yen rallied earlier today while Sweden’s krona touched a two-month high versus the dollar.

“I think the U.S. dollar could benefit in the near-term versus euro and Japanese yen because expectations of tapering likely brought forward,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. I “was surprised we got that much clarity from Bernanke regarding exit strategy, asset purchase adjustments,” he said.

The dollar added 0.8% versus the euro to $1.3279 at 3:35 p.m. in New York, after rising the most on a closing basis since April 17. The U.S. currency advanced 1.4% to 96.67 yen. The shared currency increased 0.6% to 128.39 per yen.

Mexico’s peso was the biggest loser versus the dollar among major currencies, dropping 2% to 13.1566 per dollar. Australia’s dollar lost 1.6% to 93.34 U.S. cents while the pound weakened 0.9% to $1.5499.

FOMC Policy

“The committee sees downside the risks to the outlook for the economy and the labor market as having diminished since the fall,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. It repeated that it’s prepared to increase or reduce the pace of purchases depending on the outlook for the job market and inflation.

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” Bernanke said today in a press conference in Washington. “If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

The central bank has kept the benchmark target rate for overnight loans between banks at zero to 0.25% since 2008 to support the economy.

Dollar Benefits

“The dollar is stronger, and generally that would be consistent with expectations of tapering,” said Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York, in a phone interview. “It looks like they’re expecting a better outlook for the labor market, although inflation is expected to remain weak.”

Trading in over-the-counter foreign-exchange options totaled $26.4 billion, compared with $24.1 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yuan exchange rate was $9.2 billion, the largest share of trades at 35%. Dollar-yen options were the second most actively traded, at $5.6 billion, or 21%.

Dollar-yuan options trading was 205% more than the average for the past five Wednesdays at a similar time in the day. U.S. dollar-yen options trading was 47% less than average.

The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six U.S. trade partners, rose 0.9% to 81.349, touching the strongest level since June 10.

The yen has strengthened 5.8% in the past month, the best performer among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 2.1%, while the dollar fell 1.5%.

Japan’s currency “needs to close and clear stops above 97 for” the dollar rally to continue, said Fabian Eliasson, head of U.S. currency sales in new York at Mizuho Financial Group Inc.

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