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BLBG: Dollar Advances to Five-Month High Versus Euro Before CPI Data
 
The dollar rose to the highest in five months versus the euro as an increase in short-term U.S. Treasury yields signaled mounting speculation that Federal Reserve Chair Janet Yellen will need to raise interest rates.

The correlation between dollar-yen and Treasury two-year yields rose to the highest since March before data today that economists said will show inflation held at the fastest pace since 2012. Australia’s dollar strengthened after Reserve Bank Governor Glenn Stevens chose not to add to his recent comments on the strength of the Australian dollar at a speech today. Indonesia’s rupiah weakened from a two-month high as presidential candidate Prabowo Subianto rejected the election as undemocratic.

“More evidence of higher inflation in the U.S. would be seen as positive for the dollar as long as it leads to a pickup in short-term U.S. yields,” said Lee Hardman, a foreign-exchange strategist at bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If higher inflation persists, it will challenge Yellen’s dovish view that this is just a temporary phenomenon. A stronger inflation report could be the trigger for euro-dollar to break lower.”

The dollar appreciated 0.3 percent to 1.3490 per euro at 10:03 a.m. London time, after touching $1.3481, the strongest level since Feb. 3. The euro fell 0.1 percent to 136.95 yen. The Japanese currency was little changed at 101.51 per dollar.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose 0.1 percent to 1,011.04 after advancing to 1,011.12 on July 18, the highest level since June 20.

Rate Outlook

Traders saw a 46 percent chance the Fed will raise the target rate for overnight bank lending by June, according to futures data compiled by Bloomberg as of yesterday. That’s up from a 40 percent possibility on June 30.

U.S. consumer prices climbed at an annual rate of 2.1 percent in June, matching May’s figure that was the most since October 2012, according to a Bloomberg News survey before today’s Labor Department report. The rate has increased from 1.1 percent in February.

Treasury two-year yields were at 0.49 percent after touching 0.50 percent, the highest since July 9. Their 20-day correlation with dollar-yen was 0.67 percent, indicating the strongest relationship since March 28. Two-year yields are seen by investors as most senstitive to interest-rate expectations, whereas longer maturities are more influenced by the outlook for inflation.

The dollar has appreciated 0.5 percent in the past month, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The yen advanced 1.2 percent, the best performer, while the euro lost 0.4 percent.

Aussie Advances

Australia’s dollar rose versus all except one of its 16 major peers after Stevens didn’t comment directly on the currency or monetary policy in prepared remarks at a luncheon today in Sydney. The currency tumbled 1 percent on July 3 when he said it was “overvalued” by most measures.

“I’d still maintain up to this point that we’re doing what can reasonably be done,” Stevens said in response to questions after today’s speech. “But if there’s more that can reasonably be done at some point, then obviously we’d do that. But I’m content right now.”

The Aussie gained 0.2 percent to 93.87 U.S. cents after dropping 0.2 percent yesterday.

Indonesia’s rupiah fell for the first time in five days as Prabowo withdrew his witness team from the election commission before final results scheduled to be released later today. The currency appreciated earlier on speculation the results would confirm Joko Widodo’s victory in this month’s presidential election.

Election Count

Overseas funds added 5.04 trillion rupiah ($436 million) to local debt holdings since the July 9 vote to a record 405.39 trillion rupiah as of July 17, finance ministry data show. The election commission completed its count for 24 of 33 provinces late yesterday. KawalPemilu.org, a volunteer-run website that tracks actual results, showed Widodo winning 53.2 percent support with 100 percent of ballots tallied at the provincial level, while Prabowo Subianto had 46.8 percent.

The currency fell 0.3 percent to 11,605 per dollar after strengthening earlier to 11,503, the strongest level since May 21, according to prices from local banks.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Todd White, Mark McCord
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