Dollar falls second day against yen on Fed outlook

Service Industries

The Institute for Supply Management’s U.S. non- manufacturing index increased to 56 July from 52.2 the prior month, a report from the Tempe, Arizona-based group showed today. The median forecast in a Bloomberg survey of economists called for a gain to 53.1. Readings higher than 50 indicate growth in the industries that make up almost 90% of the economy.

Fed Chairman Ben S. Bernanke said on June 19 the central bank may start dialing back its bond-buying program this year if the economy achieves sustainable growth. It has been buying $40 billion of mortgage-backed bonds and $45 billion of Treasuries each month to inject cash into the economy. The Fed has kept its benchmark lending rate at zero to 0.25% since 2008 to help cap borrowing costs.

‘Zero Rates’

“The markets have got used to the idea that we’re not staying at zero rates forever with quantitative easing forever, but we’re not going to start even thinking about rate hikes on a one-, two-year horizon unless the economy sees a faster pace of economic growth,” Kit Juckes, a global strategist at Societe Generale SA in London, said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene. “We’re going to get a slower pace of bond purchases from back end of September onwards and by this time next year they won’t be buying any bonds.”

Half of the 54 economists in a July 18-22 Bloomberg survey expected the Fed to decide to reduce the bond purchases at its next meeting on Sept. 17-18.

The dollar has strengthened 5.7% in the past six months, the best performer among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 2.8%, while the yen weakened 0.2%.

The yen rose against all except two of its 16 major peers as the Nikkei 225 Stock Average slid 1.4% as it reacted to last week’s U.S. payroll data.

The yen tends to strengthen during periods of financial turmoil because Japan’s current-account surplus makes the country less reliant on foreign capital.

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