Dollar Climbs Before Fed's Interest-Rate Decision as Bonds Fall

  • U.S. 2-year note yields rise as core inflation shows gains
  • Futures contracts show a 78% probability of rate increase

The dollar climbed versus the euro and yen as bond yields rose before the Federal Reserve’s interest-rate decision Wednesday.

The greenback gained as U.S. two-year yields reached the highest level since May 2010 after a report showed core inflation rose in November for a third month. A measure of price swings in the foreign-exchange market accelerated to close to the most this month.

With futures contracts showing a 76 percent likelihood that the U.S. will raise its benchmark from near zero on Wednesday, traders are looking past the first increase and contemplating a landscape of relatively low borrowing costs for years to come. A gauge of the dollar has surged 8 percent in the past year in anticipation of the Fed raising rates in contrast with counterparts in Europe and Japan who are carrying out unprecedented stimulus.

"It’s really very cautious," said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. in New York. "There’s so much now up in the air that I don’t think people want to take big positions," said Jones, who’s bullish on the greenback going into next year.

The dollar added 0.6 percent to $1.0930 per euro as of 5 p.m. New York time, after dropping as much as 0.6 percent. The currency gained 0.5 percent to 121.66 yen.

Price Swings

A JPMorgan Chase & Co. index of global exchange-rate fluctuations rose for a fifth day on Monday. It reached 10 percent, higher than the five-year average of 9.6 percent.

Fed Chair Janet Yellen has emphasized the central bank will follow a gradual path after an initial move, and futures show the federal funds rate will inch higher. That may limit dollar gains.

Traders are pricing in less than three increases of 0.25 percentage point in the next year, taking the fed funds effective rate to 0.75 percent from 0.13 percent, according to data compiled by Bloomberg.

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