By Oliver Biggadike and Catarina Saraiva June 28 (Bloomberg) -- The euro fell against the dollar and almost all of its other major counterparts after a U.S. report showed inflation remains muted and Group of 20 nations leaders agreed on a target for cutting budget deficits. The Dollar Index advanced, recovering from an earlier loss that took it almost to a six-week low, as 10-year Treasury notes rallied and pushed yields to the least in more than a year. Advanced economies among nations meeting in Toronto over the weekend agreed to halve deficits by 2013 while providing stimulus to support economic recovery. Spanish and Italian bonds dropped. “We have moved from an environment where growth was supported at any cost, and now we’ve shifted to fiscal responsibility,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. “With the euro there’s still this tremendous risk overhang. We’re seeing spikes in risk aversion, which create U.S. dollar buying.” The euro declined 0.2 percent to 110.17 yen at 11:09 a.m. in New York, from 110.41 on June 25. The shared currency fell 0.2 percent to $1.2341, from $1.2369. The yen traded at 89.29 per dollar, from 89.23 last week, after gaining as much as 0.2 percent and touching 89.07, the strongest level since May 21. The dollar was poised for the fourth-biggest quarterly gain against the euro among its 16 most-traded counterparts, with a 9.5 percent climb trailing increases of 9.6 percent by Brazil’s real, 11 percent by the Singaporean dollar and 15 percent by the yen. The Japanese and Singaporean currencies were also the only two to gain against the greenback over the same period, advancing 4.9 percent and 0.8 percent respectively. Euro ‘Bouncing Down’ “People aren’t keen on the whole risk backdrop,” said Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, which predicts the euro will depreciate to $1.15 in three months. “The euro’s going to keep bouncing down, and over the next few months growth issues are going to become more of a concern.” Banks need to raise capital “significantly” and countries will be allowed to phase in new rules, with a goal of meeting the standards by the end of 2012, G-20 leaders said in a statement yesterday at the close of their summit in Toronto. “Honestly, this is more than I expected, because it is quite specific,” German Chancellor Angela Merkel said, referring to the fiscal targets. “It’s a success that industrialized countries as a group accepted this.” Reflects U.S. Targets President Barack Obama said the goal set by the G-20 of cutting deficits in half by 2013 reflects U.S. targets and takes into account the fiscal and economic needs of each nation. Consumer spending in the U.S. rose last month more than forecast, bolstering speculation of a quickening recovery in the world’s biggest economy. Purchases increased 0.2 percent after little change in April, Commerce Department figures showed. Incomes climbed 0.4 percent and the savings rate increased to the highest level in eight months. U.S. stocks fluctuated, with the Standard & Poor’s 500 Index up 0.4 percent after dropping as much as 0.5 percent. Italian 10-year note yields increased 5 basis points, or 0.05 percentage point, to 4.13 percent on weak auction demand, while the yield on the comparable Spanish bond rose 7 basis points to 4.54 percent. The Swiss franc gained 1.2 percent to 1.3361 per euro. Yen Gains The yen appreciated earlier against the dollar as the decline in U.S. 10-year yields encouraged Japanese investors to sell the note while U.S. buyers sought longer-term securities to increase the duration of their portfolios to match their benchmarks at the end of the second quarter. Duration measures how sensitive a bond’s price is to changes in yield. The Dollar Index, which measures the greenback against the currencies of six trading partners, rose 0.1 percent to 85.386 after trading as low as 85.215, near the 85.091 level on June 21 that was the lowest since May 13. “We’re in the end of the month, and it’s pretty clear that we have good dollar demand,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “People for now expect the Fed to stay on hold for a long time.” The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- rose to 70,974 on June 22, from 62,360 a week earlier. The New Zealand dollar was the worst performer versus the greenback among the 16 most-traded currencies after a report showed the South Pacific nation’s business confidence declined in June. It fell 0.8 percent to 70.82 U.S. cents. A net 38.5 percent of New Zealand companies surveyed expect sales and profits will increase over the next 12 months, down from 45.3 percent in May, according to a survey by ANZ National Bank Ltd. released in Wellington today. The net figure subtracts the number of pessimists from the number of optimists. --With assistance from Bo Nielsen in Copenhagen and Candice Zachariahs in Sydney. Editors: Greg Storey, Dennis Fitzgerald To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net. To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net.

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