Dollar Holds 7-Month High as Fed Minutes Back December Rate Move

  • Central bank policy makers adjusted their policy language
  • Futures show 64% chance of rate increase at December meeting

The dollar traded near a seven-month high against the euro as minutes from the Federal Reserve’s October meeting bolstered the outlook for a December interest-rate increase.

The U.S. currency was little changed even as Fed policy makers inserted language into their October statement to stress that “it may well become appropriate” to raise the benchmark lending rate in December, minutes from the meeting showed. The central bankers largely agreed that the pace of rate increases would be gradual.

“We’ve priced the December rate hike into the dollar,” said Chris Gaffney, president at EverBank World Markets in St. Louis. “I don’t think it changed anybody’s opinion on when the liftoff is going to begin. It squarely puts it in December, and that it’s going to be slow after that.”

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, was little changed at 1,235.71 as of 5 p.m. in New York, the highest level in more than a decade on a closing basis. The dollar slid 0.2 percent to $1.0660 per euro after touching the strongest level since April, and was little changed at 123.64 yen.

Fed Message

A majority of Fed officials have signaled they expect to raise interest rates this year for the first time since 2006. That message was underscored when policy makers inserted a reference to the “next meeting” on Dec. 15-16 in their October statement, in connection with their assessment on when to act.

Participants in the meeting “generally agreed,” the minutes showed, “that it would probably be appropriate to remove policy accommodation gradually,” making it likely that the path of rate increases would be shallow after liftoff.

The probability the central bank will act next month has risen to 64 percent from 50 percent at the end of October, futures contracts show. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

“The market is coming around to the idea that a December liftoff is a high probability,” said Jennifer Vail, head of fixed-income research in Portland, Oregon, at U.S. Bank Wealth Management.

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