Dollar Rises Against Euro as Clearer Pictures of Greece, Fed Policy Emerge

        By James Ramage
        The euro posted its biggest daily decline against the dollar in three months as a resolution to the latest installment of Greece's debt crisis appeared at hand and as a Federal Reserve official bolstered confidence in higher U.S. interest rates arriving this year.
        Tuesday's drop in the common currency, which sank as far as 1.9% versus the dollar during intraday trading, is the latest example of volatility in the foreign-exchange market. A breathtaking rally in the U.S. currency that began a year ago has stalled in recent months amid doubts about the relative strength of the U.S. economy and the timing of the Fed's first interest-rate increase in nearly a decade. Since mid-March, currency markets have gyrated as investors grapple with a tepid stream of economic data and mixed signals from central bank officials.
        The bounce in the euro had continued even as worries recently intensified about Greece's bailout and its role in the eurozone. Some traders attributed the euro's strength to a reluctance by investors to place bearish bets amid the uncertainty. Now that investors appear to have more clarity on the situation surrounding Greece, they are again making wagers against the euro in favor of the dollar. The U.S. currency's outlook is being buoyed by an uptick in confidence in the American economy, thanks to stronger indicators on retail sales and wage growth.
        The euro fell steadily during European trading and took another leg down after Federal Reserve governor Jerome Powell said he sees closer-to-even chances of the central bank raising interest rates for the first time as early as September, followed by a second increase in December. Higher borrowing costs would make the dollar more attractive to yield-hungry investors.
        "When a centrist on the Fed board, a guy regarded generally as a good team player, talks up September, the market will take notice," said Richard Franulovich, senior currency strategist at Westpac Bank. "There's a lot of pent-up demand for the dollar and pent-up selling pressure for the euro."
        Mr. Powell's words helped push the dollar up by as much as 1.9% against the common currency, with one euro buying $1.1135, compared with $1.1341 late Monday. One euro bought $1.1171 in late-afternoon trade, putting the common currency 1.5% lower for the session, the biggest percentage loss since March 19.
        The dollar's rally is likely to continue for the next one or two years and could gain as much as 10%, said Scott Mather, chief investment officer of the U.S. core strategy at Pacific Investment Management Co. The asset manager, which oversees $1.6 trillion, has bets the dollar will rise against most of the major currencies in the developed and emerging markets.
        "There's stronger U.S. growth momentum now," Mr. Mather said. "As long as the U.S. numbers keep coming in strong, you'll see that confidence coming around and more people seeing a rate hike in September."
        The dollar started its climb against the euro in the European session as investors, sensing that negotiations between Greece and its international creditors are advancing toward a deal, started to use the common currency to fund trades for higher-yielding assets again, analysts said.
        But rather than helping the common currency, the euro dropped as investors saw opportunities to again enter longer-term positions, said Alan Ruskin, global head of developed-market strategy at Deutsche Bank. Investors have been waiting to resume positions against the common currency as the European Central Bank continues to ease policy to shore up growth and inflation.
        "Traders are more comfortable putting on longer, more strategic trades against the euro, without as much fear of getting sideswiped by a Greek headline," Mr. Ruskin said.
        This week, Greece and its creditors sent signals indicating they have moved closer to a resolution ahead of its deadline for a repayment to the International Monetary Fund. Greece's most recent proposal made a potentially major concession on pensions, moving the beleaguered country closer to lenders' demands for reforms.
        In other trade, the dollar gained 0.5% versus the yen, rising to 123.91 yen, heading toward its highest close in two weeks.
        Write to James Ramage at james.ramage@wsj.com
        (END) Dow Jones Newswires

        June 23, 2015 17:30 ET (21:30 GMT)

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