Dollar Rises to 12-Year High Amid European Bond-Buying, Fed Bets

The dollar surged to the strongest level in almost 12 years as the specter of higher U.S. interest rates and the European Central Bank’s acceleration of its bond-buying program cascaded through global financial markets.

The U.S. currency rallied against 14 of its 16 major peers as national central banks in the euro region were said to have purchased sovereign debt for a second day in their quantitative-easing program. The dollar touched the highest in 7 1/2 years versus the yen and rose to a record against the Mexican peso.

“You could see another round of dollar strengthening on the back of people again realizing that a Fed rate hike could be imminent,” Thierry Albert Wizman, currencies strategist at Macquarie Capital USA Inc. in New York. “U.S. rates are going up, the U.S. economy is good and the rest of the world is not in as good shape.”

The Fed stands out among major central banks in accepting a higher exchange rate as a sign of economic strength. Peers from Tokyo to Frankfurt, Zurich and Sydney are cutting rates and buying government bonds to stimulate growth and, in the process, sometimes weakening their currencies.

The dollar appreciated 1.4 percent to $1.0698 per euro at 5 p.m. in New York and reached $1.0693, the strongest since April 2003. It touched 122.03 yen, a level unseen since July 2007, before trading little changed at 121.13 yen.

The greenback climbed to parity with Switzerland’s franc for the first time since the Swiss National Bank removed a currency cap against the euro in January.

Rate Speculation

Options traders see a 56 percent chance the Fed will raise borrowing costs for the first time since 2006 by September, up from 48 percent odds at the end of February.

The ECB and euro-region central banks began their 1.1 trillion-euro ($1.2 trillion), 19-month QE program on Monday.

U.S. Treasuries rose for a second day Tuesday as investors sought higher yields than they can get in Europe amid the bond-buying. Benchmark 10-year notes yielded 2.13 percent, while 10-year German bunds yielded a record-low 0.23 percent.

“The U.S. dollar is likely to continue grinding higher against other majors” if the Fed increases borrowing costs while other central banks ease, Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York, said in a note.

The U.S. central bank meets March 17-18. Chair Janet Yellen told Congress last month that the Fed’s pledge to be “patient” on starting to raise borrowing costs means an increase is unlikely for “at least the next couple” of meetings. She signaled that dropping the vow would mean rates could be raised at any meeting.

‘More Hawkish’

“The market has become a little more hawkish in terms of what to expect” on the pledge at the March meeting, said Jane Foley, a senior currency strategist at Rabobank International in London.

Prospects of higher interest rates have helped the U.S. currency outperform most global peers in 2015 as central banks in Europe and Japan embrace stimulus to stoke growth. The dollar has rallied 6.9 percent this year, making it the top performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has gained 5.6 percent, while the euro dropped 6.9 percent, the group’s worst performer.

The Russian ruble led declines among emerging markets on Tuesday, sliding 3.4 percent against the greenback.

Peso Slides

Mexico’s peso weakened on speculation U.S. interest-rate increases will diminish the appeal of higher-yielding emerging-market assets as the drop in oil prices dims the outlook for foreign investment.

The peso depreciated as much as 1.1 percent to 15.6468 per dollar, past the record set in March 2009 when a global recession throttled export demand, before closing at 15.6240, down 1 percent.

“It’s a stronger-U.S.-dollar story,” Peter Dragicevich, a strategist at Commonwealth Bank of Australia in London, said by phone. “The general theme of the stronger dollar and markets positioning and looking to the Fed to raise rates later this year continues to come through.”

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