The dollar rose after the Federal Reserve officials voted to reduce monthly asset purchases that are seen as debasing the U.S. currency amid signs that economic growth is strengthening.
The U.S. currency strengthened versus the yen after the central bank announced plans to cut its monthly bond purchases to $75 billion from $85 billion, taking its first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s. The Fed acted as a report showed housing starts last month reached a five-year high and the Labor Department reported Dec. 6. the unemployment rate declined to 7 percent in November, the lowest in five years.
"The dust still has to settle, but ultimately it's positive for the dollar," Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a phone interview. "The fact the Fed did taper shows it's confident about the pace of recovery, and the financial market can withstand modest reduction at this time."
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The Bloomberg U.S. Dollar Index, which monitors the greenback against 10 major counterparts, gained 0.1 percent to 1.016.69 at 2:59 p.m. in New York, after increasing as much as 0.4 percent. The greenback added 0.8 percent 103.50 yen, after reaching 103.92 on Dec. 13, the highest level since October 2008. The U.S. currency advanced 0.1 percent to $1.3755 versus Europe's 17-nation common currency after gaining as much as 0.5 percent.
"At the margin, people want to be bullish on the dollar," Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said in a telephone interview. "We finally got taper, so the market can stop wondering when it's coming and focus on other things."
The central bank left unchanged its statement that it will probably hold its target interest rate at almost zero "at least as long as" unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent. Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent since 2008.
The pound, South Africa's rand, and Mexican peso led gains among the major currencies.
"The dovish forward guidance is going to drive the front end of the curve stay fairly low," Sebastien Galy, a New York-based senior foreign-exchange strategist at Societe Generale SA, said in a phone interview. The curve refers to the difference between short- and long-term interest rates.
Market Outlook
The Fed was forecast to start curtailing its monthly bond purchases this week after unexpectedly refraining from reducing them in September, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, an increase from 17 percent in a Nov. 8 survey.
The November labor force participation rate of 63 percent compares with 66.2 percent in January 2008, Bureau of Labor data shows. The U.S. cost of living was unchanged in November, as cheaper gasoline, new cars, and clothing held the consumer-price index in check after a 0.1 percent drop the prior month.
The yen fell earlier as the nation's trade deficit widened to a record.
Japan's merchandise trade deficit for November was 1.35 trillion yen on a seasonally adjusted basis, compared with the 1.2 trillion yen median estimate in a Bloomberg News survey of economists. Imports climbed 21.1 percent from a year earlier while exports rose 18.4 percent, the finance ministry said.
"The trade data is having a big impact on the yen," said Kathleen Brooks, European research director at Forex.Com in London. "The yen will have the biggest reaction" to a U.S. cut in stimulus because "if the Fed decides to taper, it leaves the BOJ on its own," she said, referring to the Bank of Japan. That may weaken the yen toward 105 per dollar, Brooks said.
Bank of Japan officials see significant scope to increase government-bond purchases if needed to achieve their inflation target, according to people familiar with the discussions.
The pound rose for the first time in six days versus the dollar after U.K. unemployment fell to 7.4 percent in the three months through October, fueling speculation the Bank of England will need to raise interest rates sooner than it plans.
The Bank of England, led by Governor Mark Carney, has pledged to keep borrowing costs low until unemployment falls to 7 percent, subject to caveats on financial stability and the central bank's inflation target of 2 percent.
Sterling added 1.1 percent to $1.6437.
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