Dollar Reaches Strongest in Two Weeks Against Euro; Real Climbs

The dollar gained to the strongest level in two weeks against the euro after Federal Reserve policy makers signaled they’ll probably raise interest rates by the middle of next year.

The greenback rose versus 14 of 16 major peers after Fed officials raised interest-rate forecasts yesterday and Chair Janet Yellen said borrowing costs could start rising “around six months” after the Fed stops buying bonds. Brazil’s real climbed on bets the nation’s central bank will raise rates. U.S. two-year note yields closed at the highest level since January, burnishing the appeal of dollar-denominated assets.

“The dollar is likely to trade more firmly,” said Daniel Katzive, a director and head of foreign-exchange strategy, North America, in New York at BNP Paribas SA. “The Federal Open Market Committee’s message this week has forced markets to reassess the likely timing of the Fed’s first rate hike, driving front-end yields up significantly in the dollar’s favor.”

The U.S. currency advanced 0.4 percent to $1.3779 per euro at 5 p.m. New York time. It touched $1.3749, the strongest since March 6, after rallying 0.7 percent yesterday. The dollar appreciated 0.1 percent to 102.39 yen after rising 0.9 percent yesterday. The yen gained 0.3 percent to 141.07 per euro.

Europe’s shared currency will fall to $1.31 by year-end, the lowest since July, according to the median estimate of analysts in a Bloomberg survey. The yen will weaken to 110 per dollar for the first time since August 2008, analysts forecast.

Brazilian Currency

Brazil’s real rallied as faster-than-forecast inflation fueled speculation the central bank will keep raising borrowing costs. The currency strengthened as much as 1.2 percent to 2.3217 per dollar before trading at 2.3279, up 0.9 percent.

The Getulio Vargas Foundation reported yesterday that Brazil’s producer, construction and consumer prices rose 1.41 percent in the 20 days starting Feb. 21, more than the 1.35 percent increase forecast by economists surveyed by Bloomberg.

Indonesia’s rupiah led losses among the dollar’s 31 most-traded counterparts after the Fed’s outline on the timeframe to raise interest rates.

“We’re seeing a broad dollar rebound after the Federal Open Market Committee meeting, and the rupiah isn’t immune to that,” said Irene Cheung, Singapore-based foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. “The expectation for higher interest rates sooner than expected” was the big surprise.

The rupiah slumped 1.2 percent to 11,445 per dollar, the biggest loss since Nov. 11.

Kiwi Declines

New Zealand’s dollar weakened for a second day after the nation’s statistics agency said gross domestic product rose 0.9 percent in the fourth quarter, versus a revised 1.2 percent during the previous three months. The kiwi fell as much as 0.7 percent to 85.02 U.S. cents before trading at 85.32 cents, down 0.3 percent.

The U.S. dollar has gained 0.8 percent in the past six months among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen slid 2.5 percent, while the euro gained 2.9 percent.

Yields on Treasury two-year notes increased as much as two basis points today, or 0.02 percentage point, to 0.44 percent before closing at 0.42 percent. They climbed seven basis points yesterday, the most since 2011. Two-year German bunds yielded 0.21 percent, and comparable Japanese government bonds yielded 0.07 percent.

The policy-setting FOMC after a two-day meeting discarded a jobless-rate threshold for considering when to increase borrowing costs and said it will look at a wider range of data. The benchmark interest-rate target has been held at zero to 0.25 percent since 2008 to support the economy.

Rate Estimates

Fed officials estimated the interest rate will be 1 percent at the end of 2015 and 2.25 percent a year later. In December, they projected 0.75 percent and 1.75 percent.

Policy makers reduced monthly bond-buying by $10 billion to $55 billion and said the purchases will be slowed in “further measured steps.” Economists surveyed by Bloomberg before the meeting forecast officials would announce an end to the program in October.

Yellen said she saw a “considerable time” between the end of the stimulus and the first rate increase, meaning “around six months or that type of thing.” She spoke at a press conference after presiding over her first policy meeting.

The Bloomberg Dollar Spot Index, which monitors the U.S. currency against its 10 major counterparts, rose 0.1 percent to 1,021.54 after reaching 1,023.65, the highest since Feb. 13. It jumped 0.8 percent yesterday, the most since August.

“The statement and forecasts contained unexpected hawkish elements, which Yellen didn’t dispel,” said Valentin Marinov, head of European Group of 10 currency strategy at Citigroup Inc. in London.

Ruble Falls

The ruble weakened, erasing earlier gains, after U.S. President Barack Obama ordered sanctions on 20 senior Russian officials and a bank in the standoff over Russia’s annexation of Ukraine’s Crimea region. The financial firm is Bank Rossiya in St. Petersburg, which officials said has $10 billion in assets and is the 17th largest bank in Russia. Obama imposed sanctions earlier on 11 individuals.

The currency depreciated 0.5 percent to 42.5585 against Bank Rossii’s target basket of dollars and euros.

France leapfrogged the U.S. as the top destination for the Russian central bank’s investments, dethroning America for the first time. The amount of reserves in French assets, including government bonds and deposits, rose to 32 percent as of June 30, a jump of 4 percentage points from three months earlier, the central bank said today in a quarterly report on its website. Bank Rossii decreased investments in the U.S. to 29.7 percent, from 33.8 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE