Dollar Bulls Celebrate as Fed Shift Fuels Rally to Decade High

  • Greenback surges versus Canadian and Australian dollars, rand
  • Fed increase sets stage for dollar rally in 2016, Citi says

How Have Markets Reacted to Fed Rate Hike?

With the decade-long wait for higher U.S interest rates finally ended, investors are piling into the dollar.

A gauge of the greenback reached the highest in data going back to early 2005 on a closing basis after the Federal Reserve unanimously voted to raise its benchmark for the first time since 2006. The currency surged to an 11-year high against its Canadian counterpart and rallied more than 1 percent against the Australian dollar and South Africa’s rand.

Policy makers delivered something for everyone, maintaining projections, known as dots, for four rate increases next year, while emphasizing the gradual pace. In doing so, Fed Chair Janet Yellen preserved expectations for further U.S. divergence from other major central banks that has already fueled dollar gains this year.

"There’s more room for the dollar to go" as the Fed raises rates, Eric Stein, a money manager at Eaton Vance Corp. in Boston, said by phone. "We’ve been in the dollar-bull camp for a while and we still remain there."

World Currency Ranker

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, climbed 0.8 percent as of 5 p.m. in New York, the highest on a closing basis since January 2005. The six straight gains marks the longest streak since October. The greenback strengthened 0.8 percent to $1.0826 per euro and 0.3 percent to 122.56 yen.

Citigroup Inc., the world’s largest currency trader, expects higher rates to foster a U.S. dollar rally over 12 months, while France’s largest bank, BNP Paribas SA ,sees the currency strengthening more than 4 percent to $1.04 per euro by the end of March, analysts at the lenders wrote.

Crude oil prices fell 1.9 percent to $34.83 a barrel in New York, while the Bloomberg Commodity Index reached the lowest level since 1999.

"We’ve been negative on commodity currencies for some time -- the outlook for divergent monetary policies is incredibly clear now," said Atul Lele, chief investment officer of Nassau, Bahamas-based Deltec International Group. "Now that the Fed’s clearly on the tightening path, it emboldens our views" that the dollar will strengthen versus the Aussie and loonie, he said.

History Watch

Currency traders have been on alert for a repeat of the dollar weakness that followed the start of tightening cycles in 2004, 1999 and 1994.

The greenback had weakened earlier this month as some traders anticipated a selloff in the currency once the central bank announced its decision to set the new target range for the fed funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. Hedge funds and other large speculators cut their bullish greenback positions in the last two readings of data from the Commodity Futures Trading Commission.

“The projections last night were much more hawkish than I was expecting,” said Roger Hallam, chief investment officer for currencies at JPMorgan Asset Management, in an interview in London. “We’ve been constructive on the dollar for the last couple of years and remain so.”

Goldman Sachs Group Inc., which modified its forecast for dollar strength versus the euro after the European Central Bank’s last meeting, predicted the greenback would climb around 14 percent though the end of 2017 against major counterparts as short-end yield premiums enhance the greenback’s allure.

“The dollar is a buy,” Goldman analysts Robin Brooks, Michael Cahill and George Cole wrote in a report. Comparisons that expect dollar weakness, based on declines that followed past Fed tightening, “ignore what a unique policy experiment has just ended.”

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