Dollar Rises to 5-Year High on Fed Rate Outlook; Yen Declines

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The dollar advanced to a five-year high against a basket of currencies with the Federal Reserve suggesting this week that policy makers may raise interest rates next year as the U.S. economy accelerates.

The greenback is headed for gains against all except one of its 31 major counterparts this year, a feat it hasn’t accomplished since 1997. San Francisco Fed President John Williams said June will be the right time to consider when to increase borrowing costs. The yen fell to a more than one-week low against the greenback after the Bank of Japan maintained unprecedented monetary stimulus. The euro slid for a third day and a gauge of Asian currencies fell.

“The U.S. dollar looks like the safest currency,” Geoffrey Yu, a senior currency strategist at UBS Group AG in London, said by phone. “If you look at price action, if you look at positioning, it looks like people don’t want to own anything else.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.4 percent to 1,125.58 as of 5 p.m. in New York, gaining 0.9 percent this week. That’s the highest close since March 2009.

The greenback climbed 0.5 percent to $1.2229 against the euro after earlier touching $1.2220, the strongest since August 2012. The dollar increased 0.6 percent to 119.50 yen and touched 119.62, the highest since Dec. 10. Japan’s currency fell 0.1 percent to 146.15 per euro.

The dollar has advanced at least 2 percent versus all of its main counterparts this year except the Hong Kong dollar, a currency pegged to the greenback and which is up 0.01 percent. The greenback last posted such a near-sweep in 1997, when another currency tied to it at the time, China’s yuan, managed a 0.23 percent gain.

Asia Slide

JPMorgan Chase & Co.’s Global FX Volatility Index ended the week 19 basis points, or 0.19 percentage point, higher at 9.84 percent, having touched 10.12 percent yesterday, the highest since September 2013. It has risen from a record-low 5.28 percent in July.

India’s rupee slid to a 13-month low this week, leading a retreat in Asian currencies as Russia’s financial crisis and declining oil prompted investors to favor safer bets than emerging-market assets. The rupee fell 0.3 percent today against the dollar and 1.6 percent since Dec. 12.

The Bloomberg JP Morgan Asia Dollar Index fell for a third day and approached a four-year low of 112.59.

‘Very Nervous’

The ruble gained, trimming a fourth weekly decline, as a short-term cash crunch exacerbated by the surprise interest-rate increase three days ago spurred demand. The currency climbed 4.8 percent to 58.55 per dollar.

“People are still very nervous -- I think there’s still some fear of capital outflows,” Jane Foley, senior foreign-exchange strategist at Rabobank International in London, said in a radio interview on “Bloomberg Surveillance.”

The yen has slumped 8.6 percent against the dollar since Oct. 30, the day before the Bank of Japan unexpectedly boosted stimulus.

“We expect the yen to weaken” to 130 per dollar by the end of next year, Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam, said by phone. “We expect the bank of Japan to support the economy and push up inflation.”

As Forecast

The BOJ will boost its monetary base at an annual pace of 80 trillion yen, it said in a statement after a meeting in Tokyo, a decision forecast by all 33 economists surveyed by Bloomberg News. The economy is expected to continue a moderate recovery as the effects of an April sales-tax increase dissipate, the BOJ said.

“If you look at the scale of BOJ easing against a normalization of Federal Reserve policy and a rate-hiking cycle, it stands to reason that dollar-yen should trade at significantly higher levels,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London.

The Bloomberg Dollar Spot Index increased for the eighth week in nine after the Fed signaled that it was on course to raise interest rates next year.

After the meeting, Fed Chair Janet Yellen laid out the economic parameters that would need to be met for liftoff.

“June 2015 seems like a reasonable starting point for thinking about when liftoff could happen,” Federal Reserve Bank of San Francisco President John Williams said today.

While still bullish, hedge funds and other large speculators reduced bets on dollar strength versus eight of its major peers by the most in nine months. The difference in the number of wagers on gains compared with those on declines -- net longs -- was 335,131 on Dec. 16, according to data from the Washington-based Commodity Futures Trading Commission. Investors amassed a record 428,558 dollar-long contracts at the start of the month.

The dollar has strengthened 12 percent in 2014, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro fell 1.7 percent and the yen weakened 2.8 percent.

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