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By Bloomberg

A measure of dollar volatility increased by the most in three weeks as the currency pared a decline from Monday against the euro.

The U.S. currency is fluctuating as investors speculate on the timing of the Federal Reserve’s first increase in borrowing costs since 2006. It jumped 1.1 percent on June 5 after better- than-expected jobs data, only to tumble by more than that on Monday as a French official told reporters U.S. President Barack Obama said at the Group-of-Seven summit that dollar strength could be a problem. The currency continued to slide even as Obama denied he made that comment.

“It has been a volatile couple of days,” said Lee Hardman, a London-based strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “Our view is still that relative fundamentals remain supportive for a stronger U.S. dollar, which is most evident in the near term against emerging-market currencies. Against the other majors, the dollar remains within a consolidation phase.”

One-week volatility on euro-dollar, a measure of anticipated price swings based on options, jumped 0.90 percentage point to 14.62 percent as of 8:33 a.m. New York time, reaching the biggest increase since May 19.

The dollar gained 0.5 percent to $1.1235 per euro, after weakening 1.6 percent on Monday. It fell 0.2 percent to 124.19 yen after reaching 125.86 on June 5, the highest level since June 2002.

Biggest Gain

The greenback is the best performer this year among developed-nation currencies after the Swiss franc, gaining 4.4 percent against a basket of peers tracked by Bloomberg Correlation-Weighted Indexes.

The French official, who asked not to be identified because the discussions were private, told reporters Obama had said geopolitical risks, including Greece, create volatility in financial markets, and in that context the strong dollar posed a problem. Obama later denied he expressed concern about the greenback’s strength. “I did not say that,” he told a news conference at the summit in southern Germany.

‘Increasingly Capped’

“The dollar’s looking increasingly capped in the near term, even if it’s still a buy over the longer term,” said Keisuke Hino, a foreign-exchange trader at Mizuho Bank Ltd. in New York. “It’s hard to believe a French official would say such a thing out of the blue. It seems there is a reason for such a report to come out and we need to be wary.”

The impact of its strength on exports could be “larger and longer-lasting than previously anticipated,” the Fed said in minutes from its last meeting. The U.S. currency’s appreciation is hurting growth and may push back the timetable for a tightening of policy, Fed Governor Lael Brainard said last week in Washington.

“It’s pretty clear from a lot of Fed commentary we’ve had this year that the strength of the dollar is more of a worry for the Fed than I perhaps would have expected at the beginning of the year,” said Ray Attrill, global co-head of currency strategy at National Australia Bank Ltd. in Sydney.