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Portfolio > ETFs > Broad Market

Dollar gains on speculation of rise in U.S. interest rates

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(Bloomberg) — A dollar headed for the highest close in more than a decade amid speculation the Federal Reserve is the only developed-nations’ central bank considering raising interest rates this year.

The U.S. currency gained versus most of its 16 major counterparts as the fewest Americans in almost 15 years filed applications for unemployment benefits. The Fed maintained its pledge on Wednesday to be “patient” on the pace of future rate gains. Australia’s and New Zealand’s currencies weakened, along with Turkey’s lira, amid speculation the nations’ central banks may be moving toward cutting interest rates. The rand pared losses as South Africa’s central bank held rates steady.

“The growth numbers are good, the jobs reports are doing very well,” said Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam. “That the European Central Bank will do that massive quantitative easing — that is a negative force” that contrasts with the Fed’s probable rate hike later this year, she said.

The Bloomberg Dollar Spot Index, a gauge of the currency’s performance against 10 major peers, rose 0.2 percent to 1,163.09 as of 8:58 a.m. New York time. It closed at 1,161.42 on Jan. 26, the highest in data going back to 2004.

The dollar gained 0.4 percent to 117.95 yen. It declined 0.3 percent to $1.1309 per euro after reaching $1.1098 versus the common currency on Jan. 26, the strongest level since September 2003. The yen weakened 0.6 percent to 133.54 per euro.

ABN forecasts the euro will fall to $1.10 by the end of this year and decline to parity with the dollar by the end of 2016. The median estimates in Bloomberg surveys are for $1.12 at the end of this year and next.

Volatility Jumps

Measures of volatility have jumped in currency markets this year as central banks from Canada to Singapore roiled markets with surprise monetary policy easing.

The euro plunged last week as the European Central Bank introduced a bond-buying program that was bigger than analysts anticipated, while money markets rates show Bank of England officials, who were last year forecast to increase interest rates before the Fed, will keep U.K. borrowing costs at record lows this year.

JPMorgan Chase & Co.’s global gauge of currency price swings climbed to as high as 11.68 percent this month, the most since June 2013, and was 10.88 percent in London Thursday.

Aussie, Kiwi

The Aussie weakened to the lowest in more than five years with swaps traders seeing 66 percent odds the Reserve Bank of Australia will cut borrowing costs on Feb. 3, setting aside the report on Wednesday that showed underlying quarterly inflation accelerated. The currency fell 1.3 percent to 77.90 U.S. cents and reached 77.74, the lowest since July 2009.

New Zealand’s dollar slid to the lowest level in almost four years, extending a drop from Wednesday, after the nation’s Reserve Bank hinted it is prepared to lower interest rates. The kiwi fell 0.4 percent to 72.87 U.S. cents, and touched 72.65, the least since March 2011.

Turkey’s currency fell to a record low versus the dollar amid speculation the nation’s central bank may cut rates as soon as next week.

The lira weakened 0.8 percent to 2.4052 against the dollar and touched a record-low 2.41481.

The rand trimmed losses as the South African Reserve Bank kept borrowing costs unchanged at 5.75 percent, even as a plunge in the oil price put the brakes on inflation. The currency declined 0.2 percent to 11.5534 per dollar after earlier tumbling 0.8 percent.

‘Patient Fed’

“Just by doing nothing the Fed appears to very diverse compared with other central banks,” said Jane Foley, a senior strategist at Rabobank International in London. “Even if they don’t hike rates in the summer” it “will be hiking interest rates when other central banks are easing policy. On a relative basis that really does underpin the outlook for the dollar.”

The Federal Open Market Committee maintained its pledge to be “patient” on raising interest rates at a two-day meeting that ended Wednesday. Policy makers noted global risks, saying they will monitor “international developments” when deciding how long to keep rates low.

Fed officials have kept their interest-rate target in a range of zero to 0.25 percent since December 2008. The chance of an increase to at least 0.5 percent by the Fed’s December meeting was 67 percent, futures data showed, down from 86 percent at the end of 2014.

The dollar gained as U.S. jobless claims plunged by 43,000 to 265,000 in the week ended Jan. 24, the lowest since April 2000, a Labor Department report showed Thursday in Washington. The median forecast of 51 economists surveyed by Bloomberg called for 300,000.

That helped push the greenback’s climb to 9.1 percent in the last three months, the most after the Swiss franc in a basket of 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen fell 0.3 percent and the euro slid 3.5 percent.

–With assistance from Mika Otsuka in New York and Kevin Buckland and Chikako Mogi in Tokyo.


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