Dollar Approaches 5-Year High on Yellen Rate View; Ruble Gains

Washington (Dec 17)  The dollar rose to almost a five-year high as Federal Reserve Chair Janet Yellen indicated that the central bank is on pace to increase interest rates as early as April.

The greenback gained against most of its major peers as officials replaced a pledge to keep borrowing costs near zero for a “considerable time” and held the rate at zero to 0.25 percent, where it’s been since 2008. Russia’s ruble snapped a seven-day drop as the finance ministry said it was selling reserves to counter a plunge that sent the currency to a record. Brazil’s real helped lead Latin American currencies higher for the first time in 10 days. The Chinese yuan fell.

“Things change quickly, and if they see a rapid rebound in the credit market and an acceleration on the payroll side, they want to have the option to raise rates significantly by mid-year,” said Robert Tipp, chief investment strategist in Newark, New Jersey for Prudential Financial Inc.’s fixed-income division, which oversees $533 billion in bonds. “It’s been a tremendous backdrop for the dollar.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major currencies, added 1 percent to 1,121.96 as of 3:42 p.m. in New York. It closed on Dec. 5 at 1,122.34, the highest since March 2009.

The dollar gained 2.1 percent to 118.86 yen, the biggest gain since October, after depreciating to 115.57 yesterday, the weakest since Nov. 17. The U.S. currency strengthened 1.3 percent to $1.2345 per euro. The yen fell 0.7 percent to 146.71 per euro after adding 1.6 percent in the previous two days.

High Volatility

JPMorgan Chase & Co.’s Global FX Volatility Index reached 10.06 percent, the highest level since September 2013. It climbed from a record-low 5.28 percent on July 4.

China’s yuan dropped to trade at the biggest discount to the central bank’s reference rate since June on signs that the increase in volatility is fueling demand for the greenback. The yuan fell 0.12 percent to close at 6.1975 per dollar in Shanghai, China Foreign Exchange Trade System prices show.

The Czech koruna declined 1.5 percent to 22.3652 per dollar after the central bank maintained near-zero borrowing costs.

The Bloomberg JPMorgan Latin America Currencies Index ended a nine-day slump, gaining on revived demand for higher-yielding assets. It closed yesterday at 80.93, the lowest in data going back to 1992.

Brazil’s real rose from a nine-year low, advancing 0.9 percent to 2.7153 per dollar. The peso of Colombia added 1.1 percent and that of Mexican climbed 0.9 percent.

Ruble, Euro

The ruble snapped its skid as the central bank announced a range of measures designed to stabilize the financial system after, the day after it unexpectedly increased the key interest rate to 17 percent from 10.5 percent. The currency rose 8.4 percent today to 61.8250 per dollar after depreciating to a record 80.10 yesterday. It remains down 47 percent this year.

The euro declined after European Central Bank Executive Board member Benoit Coeure told the Wall Street Journal there is broad consensus among policy makers for added monetary stimulus to revive euro-area inflation. ‘It’s not that much of a question on whether we should do something,’’ he said. “but more a discussion on the best way to do it.”

The central bank’s president, Mario Draghi, said on Dec. 4 that “all assets but gold” are under consideration for purchase as officials seek to step up aid to the economy.

Coeure’s comments remind the market that European stimulus “is looming, just around the corner, on the day the Fed is thinking about raising interest rates next year,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, Canada’s largest lender. “It highlights the policy divergence as we go into 2015.”

Normalization Process

The dollar extended gains after Yellen said that the shift in guidance means “the committee considers it unlikely to begin the normalization process for at least the next couple of meetings.”

The FOMC next scheduled decisions are Jan. 28, March 18 and April 29.

“The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Federal Open Market Committee said today in a statement in Washington, removing a calendar-based phrase with language that gives it more flexibility to respond to economic data. “The committee sees this guidance as consistent with its previous statement that” rates are likely to stay near zero for a “considerable time.”

‘Still Bullish’

U.S. hiring surged in November by the most since January 2012 and average hourly earnings and work week also increased. Other economic indicators including industrial production and retail sales also improved last month.

While growth is accelerating, inflation has been dragged down by oil prices, which have plunged almost 50 percent from a 2014 high in June. That gives policy makers more time to consider raising interest rates. The consumer-price index dropped 0.3 percent last month, the most since December 2008, a Labor Department report showed today in Washington.

“They’re trying to eliminate the phrase ‘considerable time’ but still give themselves some leeway to delay liftoff,” said Jennifer Vail, head of fixed income research at U.S. Bank Wealth Management, which manages $122 billion in assets. “We’re certainly still bullish on the dollar.”

Source: Bloomberg