Rates Market's Message to Currency Traders: Dollar Rally Is Back

Traders set sights on 13-year high

Interest-rate traders have gotten all the clues they need from the Federal Reserve. And the message they're taking away is: Buy the dollar.

With traders pricing in a greater chance of an interest-rate increase by the Fed in September, the spread on dollar-denominated swaps over those in euros reached 0.881 percentage point Thursday, the highest since 2007, data compiled by Bloomberg show.

Photographer: Wong, Andrea

 The widening interest-rate gap is making parking cash in greenbacks the favored trade for the $5.3 trillion a day currency market again. Loftier rates on dollar-denominated swaps than on euro swaps propelled the U.S. currency to a 12-year high in March.

``As dollar assets yield more, and give a higher return in comparison to euro-zone assets, they become more favorable to hold,'' said Viraj Patel, a currency strategist at ING Groep NV in London. ``We expect rate spreads to move further in favor of the dollar, and therefore support it.''

At about $1.09 per euro, the dollar is still 4.5 percent away from its March high of $1.0458, which was the greenback's strongest since January 2003. The currency extended a rally Thursday after the Fed signaled Wednesday that it's moving closer to raising interest rates, while data showed the world's biggest economy gained momentum in the second quarter.