Dollar Has Longest Winning Streak in 10 Months on China Rate Cut

  • U.S. currency benefits from reduced global turmoil concern
  • PBOC joins ECB in leaning toward increased monetary stimulus

The dollar posted its longest winning streak in 10 months as foreign central banks’ efforts to curb slowing global growth buoy demand for assets denominated in the U.S. currency.

A measure of the greenback reached its highest level this month as investors viewed the People’s Bank of China’s decision to lower its benchmark lending rate as an effort to address recent turmoil in emerging markets. The moves came one day after European Central Bank President Mario Draghi said policy makers may continue their quantitative easing program until September or beyond if economic weakness persists.

"It seems that momentum is certainly on the side of being short the euro right now and long the dollar," said Doug Borthwick, head of foreign-exchange at New York brokerage Chapdelaine & Co. "There’s different ways to look at -- in an environment that’s more risk-on, you’re going to see the euro sell off and dollar-yen go big," he said, adding that "the dollar would sell off versus the emerging markets." A short position is a bet that an asset will decline in value, while a long is a wager on appreciation.

The Bloomberg Dollar Spot Index rose for a seventh day, its longest rising streak since Jan. 26, to 1,212.22 as of 5 p.m. New York time. The index tracks the U.S. currency against 10 major peers. The dollar gained 0.8 percent to $1.1018 per euro, reaching its strongest since Aug. 7. The U.S. currency added 0.7 percent to 121.47 yen.

The Standard & Poor’s 500 Index of stocks advanced 1.1 percent, reaching the highest level in two months.

Hike Odds

"There’s the almost certain prospect of an expanded asset purchase program from the ECB, plus the larger easing from China," said Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York. "The combined impact of that is quite a powerful message for risk appetite."

The Federal Reserve will convene next week to discuss the possibility of raising its benchmark interest rate for the first time in almost a decade. Fed Governor Daniel Tarullo, who votes on rate decisions, said this month he doesn’t favor an interest-rate hike in 2015 after several others signaled the central bank may still increase rates this year as long as the economy stays on track.

China’s central bank’s decision to lower interest rates at the same time that the Federal Reserve is considering a hike is "a positive for U.S. risk sentiment and another reason you’re seeing the dollar strengthen," said Jennifer Vail, head of fixed-income research in Portland, Oregon, at U.S. Bank Wealth Management. "As long as the economy can continue to plug away at this moderate, sustained trajectory of growth, that means the Fed will liftoff in December and normalize."

The probability the Fed will increase rates by its March meeting rose to 60 percent, according to futures data compiled by BloombergThe likelihood of an increase this year increased to 36 percent, from 34 percent the day before. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

"It’s good for risk that we’re seeing Central Banks embrace low-rate policies seemingly for longer, but with this era of global caution, we’ll have to see what the Fed makes of that and whether or not they seem noncommittal on a 2015 rate hike," said Joe Manimbo, an analyst with Western Union Business Solutions, a unit of Western Union Co., in Washington.

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