Dollar on track for winning week as Yellen signals imminent rate hike

Updated - January 15, 2018 at 10:19 PM.

dollar

The dollar was gunning for robust weekly gains on Friday, which accelerated after Federal Reserve Chair Janet Yellen provided a strong signal that US interest rates will likely increase by year-end.

While Yellen did not explicitly say the Fed would take action at its December 13-14 policy meeting, she told a Congressional committee that a rate hike was likely “relatively soon’’.

She also pledged to serve out her term as Fed chair through 2018. President-elect Donald Trump said during his election campaign that he would replace Yellen when her term expires.

“It’s the same theme, which is continued backing up of US yields as the market reprices the prospects of Federal Reserve rate hikes,” said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong. “Those who were non-believers of a December hike have now moved into that camp, us included.”

RBC now predicts a US interest rate increase in December, followed by two more 25 basis-point hikes in 2017.

“That dynamic is helping to lift the US dollar right across the board,” she said.

Thursday’s US data gave even more credence to rate-hike bets. Housing starts marked a nine-year peak last month, weekly jobless claims fell to a 43-year low and consumer prices posted their biggest increase in six months.

The data pushed up yields on US Treasury notes, underpinning the dollar. Yields have been on an uptrend since last week’s US election, amid speculation that the Trump administration will embark on inflationary policies.

The gap between 10-year government bonds in the US and Germany widened to 200 basis points, its widest level since at least 1990, as investors expect the European Central Bank will keep monetary policy loose to stoke euro zone inflation.

The ECB’s rate-setting meeting last month had agreed on the need to maintain unprecedented monetary stimulus and to decide in December whether to extend the ECB’s €1.74 trillion asset buys, minutes of the meeting showed on Thursday.

The euro fell 0.2 per cent on the day to $1.0597 after falling as low as $1.0582, its lowest since December 3. It was down 2.4 per cent for the week.

“No dip’’

Expectations of yield differentials also helped the dollar gain on the yen, in the wake of the Bank of Japan’s move on Thursday to buy unlimited bonds. That move underscored to markets it is serious about keeping the yield on Japan’s benchmark 10-year government bond (JGB) at zero percent in its bid to control the yield curve and keep borrowing costs low.

BOJ Governor Haruhiko Kuroda would not comment on foreign exchange rates on Friday, but said he felt the rise in 2- to 5-year JGBs was inappropriate.

Finance Minister Taro Aso said that while nervous moves were seen in the forex market, the underlying moves were stabilising.

The dollar erased early slight losses to charge ahead. It was last up 0.5 per cent at 110.67 yen after rising to 110.78, its loftiest perch since June 1. It was up 3.8 per cent for the week.

“Everybody wants to buy the dollar on dips, and is waiting for dips, but there is no dip,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. “The Trump rally can continue, unless some cautious comments come out from the U.S. side.”

The dollar index, which tracks the US currency against a basket of six rivals, rose 0.4 per cent to 101.260 after rising to 101.32, its highest since April 2003. It was up 2.2 per cent for the week.

Published on November 18, 2016 05:07