Dollar Reaches 7-Month High as Minutes Show Fed Near Rate Hike

  • Futures show 66% chance of central-bank rate move by December
  • Greenback pares 2016 drop on policy-divergence speculation

FOMC Minutes Reveal a Much More Divided Fed

The dollar reached the highest level since March as minutes from the Federal Reserve’s September meeting showed several policy makers said a rate increase was needed “relatively soon.”

The greenback rose against most major peers as the likelihood of a hike by year-end climbed to 66 percent, from 60 percent a month ago. Fed Bank of New York President William Dudley said Wednesday inflation expectations are well-anchored, signaling added assurance that price gains will accelerate. A measure of the dollar’s relative strength suggests the currency may have risen too far, too fast.

"It signifies the consensus in the marketplace that yields are going up and the dollar rally is for real," said Boris Schlossberg managing director of foreign-exchange strategy at BK Asset Management in New York. "A lot of the strength has been priced in, so I don’t think there will be much more reaction post the minutes."

The greenback’s rally has pared the currency’s year-to-date loss to 2.3 percent with traders becoming more confident it will strengthen through year-end. The central bank minutes show policy makers moving toward additional tightening, which would rekindle divergence with monetary stimulus in Europe and Japan and bolster the relative allure of the U.S. currency.

Bloomberg’s Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.2 percent as of 5 p.m. New York time. It reached the strongest level since March 16. The greenback added 0.7 percent to 104.21 yen.

The currency’s 14-day relative-strength index climbed to 69, a level unseen since January. Some traders see a level of 70 or above as a signal that gains may have become overdone.

Policy makers last month left the benchmark lending-rate target unchanged in a range of 0.25 percent to 0.5 percent for the sixth straight meeting, while a majority of the 17 participants forecast at least one hike this year. Fed Chair Janet Yellen is scheduled to deliver a speech in Boston on Oct. 14 .

"The U.S. has a rate-tightening bias and the rest of the world generally has a rate-easing bias," said Philippe Bonnefoy, the founder of Switzerland-based hedge fund Eleuthera Capital AG. "The dollar is responding to that. The dollar is very comfortably bid and that bid will continue into year-end."

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