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Dollar Advances Against Yen on Policy Divergence; Loonie Weakens

Feb. 21 (Bloomberg) -- The dollar rose against the yen, extending its biggest weekly advance this year, amid speculation the Federal Reserve will keep cutting stimulus while the Bank of Japan maintains its bond-purchase plan.

The U.S. currency rose versus all except two of its 16 major peers after the Group of 20 backed the normalization of monetary policy in advanced economies, according to a draft communique seen by Bloomberg News. Canada’s dollar dropped for a third day before a report economists said will show retail sales slipped in December. Sweden’s krona fell after consumer confidence unexpectedly worsened this month. China’s yuan headed for its biggest weekly decline in offshore trading since 2011.

“The fundamentals for a stronger dollar and weaker yen remain intact,” said Neil Jones, head of European hedge-fund sales at Mizuho Bank Ltd. in London. “Divergence is a key force. The Fed continues to taper come what may, while Japan remains firmly on the pathway for further stimulus.”

The dollar rose 0.1 percent to 102.41 yen at 7:04 a.m. in New York, extending this week’s advance to 0.6 percent, the biggest since the period through Dec. 27. The U.S. currency gained 0.1 percent to $1.3707 per euro. The yen dropped 0.1 percent to 140.39 per euro.

The G-20 backed the withdrawal of stimulus and said central banks in member nations “maintain their commitment that monetary policy settings will continue to be carefully calibrated and clearly communicated,” according to the draft communique for this weekend’s meeting of finance ministers in Sydney. Fed Chair Janet Yellen will join officials for the talks starting tomorrow.

Fed Tapering

The Fed said in December it would start cutting bond purchases by $10 billion per month and policy makers decided on another reduction of the same size in January. Several officials said in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor” of continuing to trim purchases, according to the minutes of their Jan. 28-29 gathering.

The dollar gained 0.7 percent in the past week, the third best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 0.8 percent, while the yen dropped 0.1 percent.

The Bank of Japan this week doubled a funding tool to 7 trillion yen and said individual banks may borrow twice as much low-interest money as previously under a second facility. It retained its pledge to expand the monetary base by 60 trillion to 70 trillion yen per year. It is too early for a detailed discussion of exiting the strategy, central bank Governor Haruhiko Kuroda said today.

Loonie Slides

Canada’s dollar fell against all its 16 major peers before a report that economists said will show retail sales dropped 0.4 percent in December, after climbing 0.6 percent the previous month. Annual consumer-price inflation increased to 1.3 percent last month, from 1.2 percent in December, Statistics Canada will also say, a separate survey showed.

“The possibility that today’s retail sales and CPI prints could be weak has the potential to undermine the Canadian dollar further,” Morgan Stanley strategists led by head of global currency strategy Hans Redeker in London wrote in a client note.

The loonie fell 0.5 percent to C$1.1159 per U.S. dollar after slumping 1.4 percent during the previous two days.

Krona Weakens

The krona slid to the weakest this year versus the euro as the National Institute of Economic Research said an index of consumer confidence declined to 100.3 in February, the lowest since September.

Sweden’s currency fell 0.3 percent to 8.9886 per euro after depreciating to 9.0106, the least since Dec. 26. It dropped 0.4 percent to 6.5565 per dollar.

The yuan weakened after Chinese manufacturing data added to signs the world’s second-largest economy is slowing. The currency dropped 0.5 percent to 6.1043 per dollar in offshore trading, extending this week’s slide to 1.1 percent.

Thailand’s baht headed for its worst week this year after clashes between police and anti-government protesters left five people dead and injured at least 69 on Feb. 18.

The baht was little changed today at 32.539 per dollar, having slumped 0.7 percent this week, the biggest decline since the period ended Dec. 27.

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