Dollar Reaches 14-Month High as Fed Boosts Rate Outlook

The dollar rallied to a 14-month high after Federal Reserve officials raised their forecast for the target rate on overnight loans between banks at the end of 2015 while maintaining guidance to keep borrowing costs low.

The greenback rose to a six-year high versus the yen after Fed officials increased their median estimate for the federal funds rate to 1.375 percent at the end of next year, versus June’s forecast for 1.125 percent and virtually zero now. The pound gained before Scotland votes on independence tomorrow, and Australia’s dollar fell amid concern on whether China, the nation’s biggest trade partner, is trying to fuel growth.

“Getting from zero to 1.375 percent, you’re talking about some aggressive tightening that’s going to happen,” said Roger Bayston, senior vice president and director of fixed income at the Franklin Templeton fixed-income group in San Mateo, California, in a phone interview. “Any increase in the Fed outlook for the fed funds rate should certainly be positive for the dollar.”

The Bloomberg Dollar Spot Index climbed as much as 0.8 percent to 1,055.31, the highest since July 8, 2013, before trading at 1,054.08 at 5 p.m. New York time, up 0.7 percent. The gauge tracks the greenback against 10 major currencies.

The U.S. currency rallied 1.2 percent to 108.37 yen and reached 108.39, the highest since Sept. 9, 2008. The dollar climbed 0.7 percent to $1.2865 per euro and touched $1.2852, also the strongest since July 2013. The shared currency appreciated 0.4 percent to 139.42 yen.

“The end-2015 target is higher than last time, arguably the focus today is on the some of the more hawkish elements of the statement,” Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., said in a phone interview. “That’s what the dollar was reacting to and strengthening on.”

Pound Climbs

The pound gained versus most of its 16 major peers before the referendum tomorrow on Scotland’s independence from the U.K. Sterling was also supported by minutes of the Bank of England’s most recent policy meeting that showed two members voted for a second month to raise interest rates. The U.K. jobless rate fell to 6.2 percent, the lowest in six years.

The British currency strengthened 0.7 percent to 79.02 pence per euro. It gained as much as 0.5 percent to $1.6358 before trading little changed at $1.6276.

Australia’s dollar weakened versus 31 major counterparts amid speculation over whether China is taking steps to stimulate economic growth. The People’s Bank of China is providing 500 billion yuan ($81.4 billion) of liquidity to the country’s five biggest banks, the news website reported yesterday. It cited banking analyst Qiu Guanhua at Guotai Junan Securities Co.

Extended Losses

The Aussie extended losses after the Fed meeting. It slid as much as 1.6 percent, the biggest intraday drop since July 2013, to 89.51 U.S. cents, the lowest level since March 12, before trading at 89.59 cents.

The Federal Open Market Committee retained a commitment to keep interest rates near zero for a “considerable time” after winding down a bond-purchase program under the quantitative-easing stimulus strategy. It said in a statement a “significant underutilization of labor resources” remains.

Policy makers tapered monthly bond buying to $15 billion in their seventh consecutive $10 billion cut, staying on course to end the program in October.

Yellen, at a press conference after the two-day meeting, said the language of the low-rate pledge isn’t a form of calendar-based guidance.

‘Highly Conditional’

“It is highly conditional, and it is linked to the committee’s assessment of the economy,” Yellen said. “There is no fixed mechanical interpretation of a time period.”

The odds the central bank will increase its benchmark interest-rate target to at least 0.5 percent by July 2015 were 57 percent, up from 48 percent a month ago, federal fund futures showed.

An interest-rate increase would be the first since 2006. The rate has been in a range of zero to 0.25 percent since December 2008.

Foreign-exchange market volatility increased to a five-month high before the Fed meeting. JPMorgan Chase & Co.’s Global FX Volatility Index reached 7.65 percent on Sept. 15, the highest on a closing basis since April 1. The gauge declined to 7.41 percent today. The average over the past year is 7.31 percent.

The dollar dropped earlier after a report showed U.S. consumer prices unexpectedly fell last month for the first time in more than a year, declining 0.2 percent from July.

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