The dollar dropped to its lowest level this year against the yen on signs the U.S. economy is losing momentum, adding to speculation the Federal Reserve will keep its target rate at virtually zero for the rest of the year. The greenback touched a level weaker than $1.30 versus the euro for the first time since May as a gauge of U.S. confidence dropped more than forecast and consumer prices fell for a third month. The yen rallied against all of its major counterparts as a decline in U.S. stocks spurred demand for a refuge. “We’ve switched from watching Europe to watching the U.S.,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. “Interest rates are playing a very large role in markets right now.” The yen appreciated 1.1 percent to 86.46 per dollar at 10 a.m. in New York, from 87.40 yesterday, after reaching 86.41, the strongest level since Dec. 1. The yen gained 1 percent to 112.02 per euro, from 113.17. The dollar declined 0.1 percent to $1.2962 versus the euro, from $1.2950, after touching $1.3008, the weakest level since May 10. U.S. consumer prices slid 0.1 percent in June after a 0.2 percent decrease in the previous month, the Labor Department reported today. The decease matched the median forecast of 76 economists in a Bloomberg News survey. A gauge of consumer sentiment dropped to 66.5 in July from 76 in the previous month, according to the Thomson Reuters/University of Michigan preliminary index. The median forecast of 62 economists in a Bloomberg News survey was for a drop to 74. Drop in Stocks The Standard & Poor’s 500 Index fell 1.6 percent, almost erasing its gain for the week. Crude oil for August delivery fell 0.4 percent to $76.32 a barrel. “There’s still a lot of nervousness in the market, and it seems the yen can do no wrong,” said Michael Derks, chief strategist in London at FXPro Financial Services Ltd., a foreign-exchange trader. The dollar has lost 2.6 percent against the euro this week and fallen 2.1 percent versus the yen. The euro has appreciated 0.6 percent versus Japan’s currency. Traders cut bets to 14 percent that the Fed will increase its benchmark rate by its December meeting, down from 27 percent odds a month earlier, according to CME Group Inc. futures. “The poor economic data has helped weaken expectations for any increases in U.S. interest rates,” said Yuichiro Harada, senior vice president of the foreign-exchange division in Tokyo at Mizuho Financial Group Inc., Japan’s second-largest publicly traded bank in terms of assets. “The market is gradually leaning toward a sell-the-dollar mode.” Yield Spread The yen rose against the dollar as the extra yield investors demand to hold Treasuries over Japanese debt shrank. The difference between two-year yields was 0.45 percentage point, compared with this year’s low of 0.44 percentage point, set on June 29. “A narrowing in yield spreads between Japan and the U.S. notes also creates the basis for yen appreciation,” said Masaaki Kanno, chief economist in Tokyo at JPMorgan Chase & Co. and a former official at the Bank of Japan. Global demand for long-term U.S. financial assets slowed in May from a month earlier as investors abroad sold stocks and accumulated Treasuries at the weakest pace in a year. Net buying of long-term equities, notes and bonds totaled $35.4 billion for the month, compared with net purchases of $81.5 billion in April, the Treasury Department reported today. Including short-term securities such as stock swaps, foreigners bought a net $17.5 billion, compared with net buying of $13 billion the previous month. China’s Holdings China, the biggest foreign investor in Treasuries, lowered its holdings by $32.5 billion in May to $867.7 billion. In a report to Congress released July 8, the Treasury Department said China’s currency, the yuan, “remains undervalued” after the nation last month ended its peg to the dollar. It also said China took a “significant step” when it began to allow markets to drive the currency higher. New Zealand’s dollar dropped 2.1 percent to 71.46 U.S. cents and lost 2.9 percent to 61.92 yen as a report showed slower inflation for the South Pacific nation. Consumer prices rose 0.3 percent last quarter, Statistics New Zealand said in Wellington today. The median forecast of economists was for a 0.4 percent gain. The Reserve Bank of New Zealand raised the official cash rate to 2.75 percent on June 10 in the first increase in three years. Traders are betting policy makers will boost the benchmark by 1.24 percentage points over the next 12 months, after wagering on a 1.30 percentage point advance at the start of the week, according to a Credit Suisse Group AG index. To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

Source