Did dollar ascend its throne too quickly?

The dollar fell the most in two weeks on speculation the currency strengthened too rapidly in September and before factory orders data today that may highlight the uneven nature of the U.S. recovery.

The euro (CME:E6Z14) rose as European Central Bank President Mario Draghi said the central bank will begin buying covered bonds this month and asset-backed securities before year end. Japan’s yen (CME:J6Z14) advanced as Vice Finance Minister Nobuhide Minorikawa said weakness in the currency is hurting some companies by driving up imported energy prices. The New Zealand (CME:N6Z14) and Australian dollars (CME:A6Z14) jumped as policy makers eased property restrictions in China, the South Pacific nations’ biggest trading partner.

“It’s difficult to see how much of this is a dollar move and how much is the market beginning to question what the ECB can do,” said Jane Foley, senior foreign-exchange strategist at Rabobank International in London, said before Draghi made his comments at a press conference in Naples, Italy. “It may be time to take a little bit of profit. There is a lot of talk Draghi could disappoint today.”

The Bloomberg Dollar Spot Index declined 0.1% to 1,069.39 at 1:44 p.m. London time. That’s the biggest drop since Sept. 18.

The euro added 0.2% to $1.2646 after touching $1.2571 on Sept. 30, the lowest level since September 2012. The yen appreciated 0.2% to 108.73 per dollar, having reached 110.09 yesterday, the weakest since Aug. 25, 2008.
 

Currency Swings
 

Implied volatility on one-month options for dollar-yen rose to 8.6650% from 8.565% yesterday, poised for its highest close since March. The measure is used to set option prices and gauge the expected pace of currency swings. The average this year is under 7%.

U.S. data today showed the number of applications for unemployment benefits unexpectedly fell in the week ended Sept. 27. A separate report will show factory orders tumbled, according to a Bloomberg survey of economists.

“The dollar is consolidating after reaching 110 yen, and other currencies which were a bit oversold against the dollar are being bought back,” said Marito Ueda, senior managing director at currency-margin company FX Prime Corp. in Tokyo. “Investors are adjusting their positions ahead of the ECB meeting as the dollar’s recent rise has been quite rapid.”
 

Worst Performers
 

Minorikawa’s comments on the yen came after former finance minister Hirohisa Fujii said that further declines in the currency may trigger intervention. The Bank of Japan’s policy of monetary easing leading to a weak yen is mistaken, he said in an interview yesterday.

The dollar (NYBOT:DXZ14climbed 3.6% in the past month, the biggest gain among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The Australian dollar weakened 2.6%. Japan’s currency fell 0.3%.

The Aussie rallied today after trading at an eight-month low yesterday, and the kiwi climbed more than 1% after Chinese policy makers eased property restrictions. The move by the People’s Bank of China on Sept. 30 marked a reversal in a four-year tightening campaign, as slowing property investment and industrial production raise risks that economic growth will drift too far below the government’s target.

The Aussie also climbed after the statistics bureau said approvals to build or renovate homes and apartments increased 3% in August from the previous month, compared with the median forecast of analysts for a 1% gain. The nation’s trade deficit narrowed to A$787 million from a A$1.08 billion shortfall in July, the bureau said.
 

‘Sharp Move’
 

“Reports from China on some policy easing plus the data today on housing approvals have given the Aussie some support,” said Greg Gibbs, the head of Asia-Pacific markets strategy at Royal Bank of Scotland Group Plc in Singapore. “This is just the market reassessing where the Aussie should trade after a very sharp move lower over the past month.”

The Australian currency climbed 0.5% to 87.79 U.S. cents and the kiwi added 1.1% to 78.74 U.S. cents.

The euro dropped the most since November 2011 after Draghi announced a final round of interest-rate cuts and a plan to buy privately owned securities at the central bank’s Sept. 4 meeting.

The ECB will give more detail on its bond-buying plans at 3:30 p.m. local time in Italy, Draghi said at the press conference today.

Policy makers kept the benchmark interest rate unchanged today, as predicted by all analysts surveyed by Bloomberg News.

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