Too Soon to Call Dollar Top Says World No. 2 Currency Trader

  • U.S. currency may gain 10% in next two years as Fed tightens
  • Easing by other central banks will boost trade-weighted dollar

It’s too early to call a top for the dollar, according to Deutsche Bank AG, the world’s second-largest currency trader.

The greenback’s rally in anticipation of the first Federal Reserve interest-rate increase in almost a decade still has room to run, albeit at a slower pace, said Alan Ruskin, global head of Group-of-10 currency strategy at Deutsche Bank in New York. The dollar has gained 11 percent versus the euro this year after rising 14 percent in 2014.

That’s because the currency still hasn’t strengthened enough on a broad, trade-weighted basis, assuming the Fed begins to tighten monetary policy gradually while most other central banks are easing, Ruskin said. Deutsche Bank is the world’s second-biggest currency trader, after Citigroup Inc., according to a Euromoney survey.

"Starting the cycle, you’re going to see a pretty significant adjustment in interest-rate spreads in favor of the dollar,” Ruskin said by phone. "It’s obviously not just a Fed story -- it’s about easing elsewhere.”

Dollar Levels

The U.S. currency rose to $1.0845 per euro, the highest in more than three months, after Fed Chair Janet Yellen said at a House Financial Services Committee hearing that an interest-rate increase in December is a “live possibility” if economic data hold up. It climbed 0.5 percent to 121.61 yen at 11:21 a.m. in New York.

"Dollar gains have been more front-loaded before this eventual Fed tightening than any past pre-Fed tightening period,” Ruskin wrote separately in a note. "This would suggest smaller and slower gains ahead, with 10 percent U.S. dollar trade-weighted gains spread over the next couple of years."

In the short term, the dollar’s bullish momentum is surging on speculation that the Fed is inching toward an interest-rate increase next month, according to BNP Paribas SA. An indicator tracking the pace of gains for the greenback rose to 42 this week from 17 last week, the bank said in a note Tuesday.

Traders see a 56 percent chance that the Fed will boost borrowing costs from near zero in December, up from 34 percent before the central bank met last month. 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.

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