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June 22 (Bloomberg) — Boris Schlossberg, director of research at online currency trader GFT Forex in New York, talks with Bloomberg’s Rishaad Salamat about changes to China’s currency policy.

China’s yuan gained the most in five years yesterday after the central bank pledged on June 19 to make the currency more flexible. Schlossberg also discusses the outlook for the U.S. economy. (Source: Bloomberg)

00:00 Pace of yuan revaluation; factors behind move
02:10 Trade imbalances; global, U.S. economy

Running time 04:12

The yen rallied against all 16 of its most-traded counterparts after a report showed existing-home sales in the U.S. unexpectedly fell in May, spurring speculation growth may be slowing in the world’s largest economy.

The dollar advanced against all major currencies except the yen, pound and franc. The pound extended gains after Fitch Ratings said the U.K.’s emergency budget was a “strong statement of intent” to tackle public finances. The euro fell the most versus the yen in more than two weeks amid speculation European banks will struggle to raise money.

“Housing is going to continue to be a drag on the economy,” said Alan Kabbani, a senior currency trader at Wells Fargo & Co. in Charlotte, North Carolina. “The market is consolidating to see how the U.S. and the global economy will react.”

The yen gained as much as 1.2 percent against the euro, the most on an intraday basis since June 7, to 110.86 yen before trading at 111.14 at 5 p.m. in New York, up 0.9 percent. It rose 0.6 percent to 90.57 per dollar, from 91.11 yesterday.

The euro declined 0.3 percent versus the dollar to $1.2271 after strengthening yesterday to $1.2487, the highest level since May 24.

U.S. stocks tumbled after swinging earlier between gains and losses, with the Standard & Poor’s 500 Index dropping 1.6 percent. It climbed as much as 1.2 percent yesterday after China pledged to add flexibility to the yuan’s fixed exchange rate.

Euro, Stocks

The 22-day percentage correlation between the euro and the S&P 500 was 79 percent, after touching 80 percent yesterday. It was 26 percent in March. A reading of 100 would mean the pair moved in lockstep.

The U.K. will impose a levy on banks and raise the sales tax as part of what the government called its biggest peacetime deficit cut. Chancellor of the Exchequer George Osborne forecast growth will decline to 1.2 percent this year and 2.3 percent in 2011. The measures are aimed at guarding the nation’s top credit rating without strangling the economic recovery. Sterling appreciated 0.4 percent to $1.4816.

“The U.K. budget doesn’t appear to be particularly painful for the recovery,” Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “They seem to be avoiding a lot of the more painful cuts in spending, tax increases on a broader basis.”

Existing-Home Buys

Purchases of previously owned homes in the U.S., which are tabulated when a contract closes, decreased to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. The median forecast in a Bloomberg News survey was for a rise to a 6.12 million pace.

The euro extended a decline that was triggered by speculation that China’s central bank will move to limit gains in the yuan after loosening a two-year peg to the greenback.

The Chinese currency weakened the most since December 2008, falling 0.2 percent to 6.8130 per dollar.

The yen has risen 10.5 percent this year, the best performance among the Group of 10 currencies, according to the Bloomberg Correlation-Weighted Currency Indices. The euro was the worst performer, falling 9.7 percent.

Speculation that European banks will have difficulty raising money supported demand today for the yen as a refuge.

‘Funding Problems’

“Some banks have started facing increasing funding problems,” European Central Bank governing council member Christian Noyer said yesterday at a conference in Paris. “The situation reflects a general state of uncertainty which, left unchecked, could have significant consequences on financial stability.”

The euro is poised to fall to a one-week low of $1.2215 in the next two days after a “bearish engulfing” overwhelmed traders who had been buying it, according to Barclays Plc. The shared currency yesterday touched a high of $1.2487 and a low of $1.2304, surpassing both its high and low of the previous day.

The pattern is “indicative of near-term exhaustion,” MacNeil Curry, a technical analyst at Barclays in New York, said yesterday in a telephone interview. “I would be inclined to say we’re going to see new lows, but on a short-term basis, a very short-term basis like the next session or two, $1.2215 would be an initial point.”

The Swiss franc appreciated against the euro after Swiss National Bank Vice Chairman Thomas Jordan said there’s no need to intervene to stem the currency’s rise as the threat of deflation has largely disappeared. The comments came on Swiss TV’s Eco program last night. The franc traded at 1.3589 per euro, up 0.8 percent, after strengthening to a record 1.3586.

The Federal Reserve’s Federal Open Market Committee began a two-day meeting today and will release a policy statement tomorrow. It will hold the benchmark rate steady at zero to 0.25 percent, according to economists in a Bloomberg survey.

“While the FOMC is still likely to anticipate moderate growth, it may tweak several factors lower, giving a softer cast its overall assessment,” analysts including Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co., wrote in a research note today.

To contact the reporters on this story: Catarina Saraiva in New York at [email protected]; Oliver Biggadike in New York at [email protected].