Dollar Rallies Longest in Four Years on Policy Divergence

New York (Oct 4)  The Bloomberg Dollar Spot Index gained for a seventh week, the longest rally in four years, as U.S. jobs gains fueled a widening gap between the Federal Reserve moving toward higher interest rates and further stimulus in Europe and Japan.

The U.S. currency climbed against all of its 16 major counterparts after data showed American employers added more workers than forecast last month and the unemployment rate fell to the lowest since 2008. The euro fell to a two-year low as European Central Bank President Mario Draghi held interest rates at a record low. The pound slipped below $1.60 for the first time in almost a year. The yen dropped an eighth week before the Bank of Japan meets on policy Oct. 7.

“The Fed’s going to like the unemployment rate,” said Roger Bayston, senior vice president and director of fixed income at the Franklin Templeton fixed-income group in San Mateo, California, in a phone interview yesterday. “With the Fed getting closer to raising rates versus the Bank of Japan and the ECB, the dollar should be much stronger versus the yen and the euro.”

The Bloomberg Dollar Spot Index rose 1.1 percent to 1,078.65 this week in New York, the highest on a closing basis since June 2010. The seven-week rally was the first since June 2010.

The euro slumped 1.3 percent to 1.2516, dropping the most since the week ended Sept. 5, and touched two-year low of $1.2501. The yen lost 0.4 percent to 109.76 after touching 110.09 on Oct. 1, the weakest since August 2008. The yen strengthened 0.9 percent to 137.36 versus the 18-member common currency.

Winners, Losers

The Russian ruble led 29 of the U.S. dollar’s 31 major peers lower this week, dropping 1.9 percent to stretch its loss this year to 18 percent, the most among majors after the Argentine peso’s 23 percent slide. Brazil’s real slumped 1.6 percent before presidential voting begins tomorrow.

Chile’s peso and the Malaysian ringgit were the only major currencies to advance versus the dollar, adding 0.2 percent and 0.1 percent.

Volatility in the Hong Kong dollar climbed to the highest since October 2012 amid the worst civil unrest since the 1960s. Pro-democracy protesters took to the streets to demand free and open elections and the resignation of the city’s leader.

The currency was little changed at 7.7615 versus the U.S. dollar on the week after touching 7.77, the lowest level since May 2012.

‘Fairly Dramatic’

The euro fell this week as ECB policy makers kept key interest rates unchanged at record lows, as predicted by all analysts surveyed by Bloomberg.

Draghi failed to provide details on the size of a plan to buy private debt, after previously saying he would steer the balance sheet back toward levels seen at the start of 2012, signaling as much as 1 trillion euros ($1.3 trillion) in assets may be added.

“The violence of this euro move has been fairly dramatic,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, said Sept. 30. “We’re in this period of broad U.S. dollar strength. It’s fairly hard for almost any currency to strengthen in that kind of environment.”

The yen weakened versus the U.S. currency, adding to September’s decline that was the steepest in 20 months. Intervention to curb the slump is “possible,” according to Hirohisa Fujii, a former finance minister and member of the opposition party. Some companies are suffering from the weaker yen, Nobuhide Minorikawa, Japan’s vice finance minister said this week.

‘Weaken Further’

The Bank of Japan meets Oct. 7 to discuss monetary policy, after committing 60 trillion yen ($553 billion) to 70 trillion yen to annual asset purchases. BOJ Governor Haruhiko Kuroda said last month, after the dollar rose above 109 yen, that he didn’t see any big problems with current movements in exchange rates.

“I wouldn’t be surprised to see the yen weaken further,” said Jennifer Vail, head of fixed income at U.S. Bank Wealth Management in Minneapolis. “I don’t think it’s at levels that are cause for alarm at this point.” Vail sees the yen weakening to 111 by year-end.

The dollar extended gains yesterday as the U.S. unemployment rate dropped to 5.9 percent, the lowest since July 2008, falling below a Bloomberg survey that projected the rate would hold at 6.1 percent. Payrolls increased by 248,000 workers, versus the median forecast of economists in a Bloomberg survey for a 215,000 advance.

‘Making Progress’

The Fed is considering the timing for its first interest-rate increases since 2006 amid signs the U.S. economy is recovering. The central bank, which meets Oct. 29, is on track to end a program of stimulatory bond purchases this month.

“The Fed has to feel we’re making progress and it’s time for them to consider tightening,” said Richard Schlanger, who helps invest $30 billion in fixed-income securities as vice president at Pioneer Investments in Boston.

Policy makers said at their meeting in July they might increase rates sooner than anticipated if labor-market gains quicken, according to minutes released Aug. 20. Officials at the Fed’s meeting last month forecast the target would be 1.375 percent at the end of 2015.

Futures trading shows a 52 percent likelihood that the Fed will raise interest rates to 0.5 percent or higher by the end of July. The target rate has been maintained in a range of zero to 0.25 percent since 2008 to support the economy.

The dollar gained 4.9 percent in the past month, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro lost 0.7 percent while the yen fell 0.4 percent.

Source: Bloomberg