Year of the Dollar Ends on a High as Monetary Policy Wins Out

Currencies in 2016: What's Next for the Yuan, Dollar?
  • Greenback posts third yearly gain after Fed raises rates
  • Yen has record fourth annual loss; euro slumps 10 percent

The dollar outperformed all of its 16 major peers in 2015 after the Federal Reserve began its first interest-rate-raising cycle in almost a decade.

A gauge of the U.S. currency posted a third year of gains after central bank policy makers deemed the economy strong enough to merit boosting rates from virtually zero. The yen had a record fourth annual decline, while the euro slumped a second year, as stimulus in Japan and the euro area widened the gap between monetary policy in those regions and the U.S.

Divergence was the name of the game for currency traders in 2015 as U.S. policy makers inched toward tighter monetary conditions, while central banks elsewhere eased. That sent the dollar flying higher during the first three months of the year, before disappointing economic data and dovish talk from the Fed stalled the rally. Incremental gains followed as the Fed finally delivered higher rates.

“The story for most of the year was weakness in foreign currencies against the dollar rather than dollar strength, in the sense that Fed tightening expectations kept being pushed back,” said Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA. “2015 was mostly about the foreign leg and 2016 should be more about the U.S. leg” of divergence, he said.

The dollar advanced versus all 16 of its major peers in 2015, with gains ranging from 49 percent against Brazil’s real to less than 1 percent versus the yen and Swiss franc. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, has advanced 9 percent this year, and traded at 1,232.59 as of 5 p.m. in New York.

The yen weakened 0.4 percent this year to 120.22 per dollar, set for its longest streak of annual losses in data compiled by Bloomberg from 1971, while the 19-nation euro tumbled 10.2 percent versus the greenback in 2015. Japanese financial markets were shut Thursday for a public holiday.

Divergence Resurgent

More Fed rate increases are forecast in 2016, with futures showing about two and the central bank projecting four. That should give the dollar another leg up, with the currency forecast to appreciate versus seven of 10 major peers.

“We are looking for a stronger dollar in the New Year, with the assumption that the Fed hikes rates more than the market currently expects, adding further to the policy divergence story relative to the European Central Bank and other major central banks,” said John Hardy, Saxo Bank A/S’s Hellerup, Denmark-based head of foreign-exchange strategy.

The euro will tumble to 95 U.S. cents by the end of next year, he said -- a level last reached in 2002.

A combination of Bank of Japan stimulus and higher U.S. rates will send the Japanese currency down another 4 percent next year, according to the median estimate in a Bloomberg survey.

“Policy divergence trades still have legs in 2016,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “We see further, albeit small, upside for the dollar against the yen and the euro as it has already come a long way.”

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