Dollar Index Poised for Weekly Decline Before U.S. Spending Data

Bloomberg, (31/5) -- The Dollar Index was set for a weekly decline ahead of a U.S. report today forecast to show consumer spending stagnated, damping speculation the Federal Reserve will taper its quantitative easing program.

The yen fell versus Group-of-10 currencies as a decline in consumer prices added to the case for the Bank of Japan to step up its stimulus efforts that tend to spur investors to chase higher yields offshore. A gauge of expected swings in the euro climbed to a two-month high before the European Central Bank sets policy next week.

“The dollar has been very sensitive to the U.S. data,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp., Australia’s second-biggest lender. “Clearly if the data gets better, QE will likely be reduced, if the data gets worse, QE could be increased, so that is the number-one story driving the markets.”

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against currencies of six U.S. trading partners, was little changed at 83.044 as of 7:15 a.m. in London. It has fallen 0.8 percent in five days through today, set for the biggest weekly slide since Feb. 1.

The yen weakened 0.1 percent to 100.82 per dollar, trimming its weekly advance to 0.5 percent. It lost 0.1 percent to 131.49 per euro, having declined 0.4 percent since May 24. The greenback traded at $1.3042 per euro from $1.3050, poised for a 0.8 percent decline this week.

U.S. Commerce Department data today is likely to show that consumer spending in the U.S. was unchanged in April from a month earlier, according to the median estimate of economists in a Bloomberg News survey.

The personal-consumption-expenditure index deflator, the Fed’s favored inflation gauge, probably fell 0.2 percent last month from March, the most since May 2012, a separate poll of economists shows.

In Japan, consumer prices excluding fresh food fell 0.4 percent in April from a year earlier, the statistics bureau said today, compared with a 0.5 percent drop the prior month. The inflation rate hasn’t been above zero in the past year.

The BOJ doubled its monthly bond purchases last month to more than 7 trillion yen ($69 billion). The central bank aims to achieve its 2 percent inflation target at the earliest time, BOJ Deputy Governor Hiroshi Nakaso said today.

“We’re bearish on the yen over the medium term,” said Westpac’s Speizer. “The reasons for that are continuing QE in Japan and more outflows from Japan,” he said, referring to the quantitative easing program of bond purchases.

Central bank Governor Haruhiko Kuroda said on April 12 that investors are expected to shift to stocks and overseas bonds from Japan’s government debt as a result of the central banks’s “massive” purchases of JGBs.

The International Monetary Fund said today that it does “not see the yen’s recent depreciation as problematic” as long as monetary stimulus is directed toward domestic goals. The IMF fully endorses the BOJ’s “sweeping enhancements” to its monetary policy, it said in a statement.

The ECB is scheduled to have a policy meeting on June 6. It cut the benchmark rate by a quarter percentage point to a record 0.5 percent on May 2, when President Mario Draghi signaled that officials may take the unprecedented step of charging banks to park excess cash with the ECB.

The one-week implied volatility of the euro, derived from option premiums, jumped to as high as 11.3 percent today, a level unseen since March 22. It has risen 3.9 percentage points this week to 11.29 percent.

“Volatility could increase next week surrounding the ECB press conference, in particular with reference to comments surrounding negative deposit rates,” foreign-exchange strategists at BNP Paribas SA, led by Steven Saywell in London, wrote in a research yesterday.