Prudential Sees Another Dollar Year on Central-Bank Divergence

This will be another another banner year for dollar as the Federal Reserve considers raising interest rates for the first time since 2006 amid economic growth while central banks in Europe and Japan embrace stimulus, according to Prudential Financial Inc.

“The U.S. has really been cruising along at a very even speed,” Robert Tipp, chief investment strategist for Prudential’s fixed-income division, said in an interview in Newark, New Jersey, last week. “There’s a good likelihood that that divergence between the Fed and the rest of the world on the monetary-policy side is going to make it a dollar year again.”

The world’s biggest economy expanded 5 percent in the third quarter, the most in 11 years, while the euro region grew 0.8 percent. Japan has entered a recession. U.S. Treasuries have rallied as yields remained higher than those of Group of Seven peers.

The dollar gained in 2014 against all of its 16 major counterparts.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, has gained 1.1 percent this year after climbing 11 percent in 2014. It traded at 1,143.22 today in New York after closing at 1,147.54 on Jan. 8, the highest in records dating to 2004.

The Fed signaled Dec. 17 it was on track to raise interest rates from virtually zero in mid-2015. The ECB meets next week amid speculation it will announce sovereign-debt purchases under the quantitative-easing stimulus strategy. The Bank of Japan boosted purchases of Japanese government bonds last year.

‘More Nuanced’

Tipp, whose division oversees $533 billion in bonds, said yields on U.S. Treasury two-year notes will be pushed higher as the Fed approaches a rate increase. Shorter-term maturities are more sensitive to monetary policy than longer-term debt, which is more sensitive to inflation.

“It’s going to be like last year in the sense there will be a strong dollar, but maybe more nuanced,” Tipp said. “In the U.S., there’s a two-speed deal where the first two years of the curve are going to be driven by the Fed,” he said, referring to the Treasury yield curve. “But the forward rates from three to five years, and all the way out, are probably going to be held down by what’s going on in core Europe and Japan.”

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