Dollar Rises in Best Week Since Early November on Fed Outlook

  • Fed's Lacker says interest-rate increase a sign of strength
  • Futures data show next rate boost seen in first half of 2016

How Does the Fed Rate Hike Impact Currencies?

A gauge of the dollar climbed for its best week since the start of November as the Federal Reserve’s interest-rate decision this week also prompted traders to bring forward expectations since last Friday for the next increase.

The U.S. currency strengthened against 13 of 16 major peers as futures traders raised to 50 percent the odds of an April rate increase. Richmond Fed President Jeffrey Lacker said during a panel discussion in North Carolina that the economy has stabilized and is in a good position going forward.

"This policy cycle will be dominated by dollar appreciation," said James Kwok, head of currency management at Amundi SA, by phone from London. "Even though it’s just a 25 basis-point hike by the Fed, that will mean the dollar will appreciate a lot against all the other countries that cannot afford to hike," particularly in Asia, said Kwok, whose company manages 952 billion euros ($1 trillion), making it the biggest publicly traded money manager in Europe.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.7 percent this week as of 4 p.m. in New York, the most since the period through Nov. 6. It dropped 0.4 percent Friday. The U.S. currency was at $1.0868 per euro, 1.1 percent higher this week.

Rate Projections

“There is still scope for more dollar gains if the U.S. data improve and Fed speakers such as Lacker start sounding more hawkish regarding the pace of tightening,” said Khoon Goh, a senior strategist at Australia & New Zealand Banking Group Ltd. in Singapore. Policy makers’ projections “suggest four hikes next year, while markets are only pricing in two. ”

The dollar gauge Thursday reached the highest in data going back more than 10 years after the Fed unanimously voted to raise its benchmark for the first time since 2006. Policy makers maintained projections, known as dots, for four rate increases next year, while emphasizing the gradual pace. 

The decision preserved expectations for further U.S. divergence from other major central banks, with the focus now shifting to how quickly the next rate move will come.

There’s a greater than 68 percent probability that the Fed will boost rates again in June, with pricing rising to 90 percent only from the December 2016 meeting on, data compiled by Bloomberg show.

“There’s still a great deal of market uncertainty on how far interest rates will go up in the U.S.,” said Thomas Averill, a managing director in Sydney at Rochford Capital, a currency and rates risk-management company. “The U.S. dollar is more likely to benefit from risk-aversion type trade, than it is from U.S. economic bullishness.”

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