- Central bank downplays international economic headwinds
- U.S. currency strengthens versus most major counterparts
The dollar strengthened to a two-month high after the Federal Reserve signaled it may still raise interest rates this year after deciding to hold off at Wednesday’s meeting.
The U.S. currency advanced against most major peers after policy makers said the economy is still expanding at a “moderate” pace, giving themselves the option to tighten policy at their next meeting in December. Futures prices showed an increased probability of a December rate rise as the central bank also removed a line from September’s statement saying that global economic and financial developments “may restrain economic activity somewhat.”
“Near term, you’re definitely likely to see the dollar strengthen,” said Brendan Murphy, a senior portfolio manager at Standish Mellon Asset Management Co., who manages $19 billion of fixed-income assets from Boston. “December is really very much on the table in terms of the potential for a rate increase."
The Bloomberg Dollar Spot Index gained 0.6 percent to 1,218.06 as of 5 p.m. in New York, touching the highest level on an intraday basis since Aug. 7. The U.S. currency added 1.2 percent to $1.0923 per euro and rose 0.5 percent to 121.09 yen.
Even with a slower pace of recent job gains, “labor market indicators, on balance, show that under-utilization of labor resources has diminished since early this year,” the Federal Open Market Committee said in a statement Wednesday following a two-day meeting in Washington.
Futures markets show a 46 percent chance of the Fed raising rates by its meeting in December, up from 35 percent Tuesday. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.
“The language is definitely more accommodative of a tightening of policy,” said Lennon Sweeting, a currency-payments analyst in Toronto at the foreign-exchange transfer company USForex Inc. “They’ve definitely left December in play, and I think that has a little bit to do with why we’re seeing the dollar rally the way it has.”
The European Central Bank said last week it plans to re-assess its quantitative-easing plan in December, prompting speculation of increased bond-buying.
"The Fed’s nod towards the December meeting reignites the policy-divergence theme and broad U.S. dollar strength story, especially with the European Central Bank potentially in play," said Matt Derr, a foreign-exchange strategist in New York at Credit Suisse Group AG.
The dollar’s appreciation had lost momentum this year amid signs of slowing U.S. growth, ranging from industrial production to retail sales. The dollar index was little changed this month, and it has failed to reach new highs following a 22 percent surge from July 2014 until March this year.