Dollar Rises on Fed Wagers as Euro Drops After Draghi Comments

Frankfurt (Jan 2)  The dollar strengthened before reports that may reinforce speculation the Federal Reserve is on course to raise interest rates this year while the European Central Bank prepares to extend its stimulus measures.

The U.S. currency climbed versus all but one of its 16 major peers and added to an advance against the euro that propeled it in 2014 to its best year since 2005. The euro reached a 4 1/2-year low after ECB President Mario Draghi said he can’t exclude the risk of deflation in the currency bloc and signaled that the likelihood of large-scale quantitative easing is increasing. The Australian and New Zealand dollars dropped as a Chinese manufacturing gauge slipped to the least in 18 months.

“We are seeing an extension of ongoing themes,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “It’s all about continued improvement in the U.S. and whether that first Fed rate hike is moved forward. Then there’s the anticipation of the ECB launching an easing program.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.5 percent to 1,136.49 at 10:39 a.m. London time, set for the highest close since March 2009. The gauge increased 11 percent last year, the biggest gain in data going back to 2005.

The U.S. currency advanced 0.5 percent to $1.2048 per euro after appreciating to $1.2035, the strongest level since June 2010. The dollar gained 0.6 percent to 120.44 yen. The euro rose 0.1 percent to 145.10 yen.

Manufacturing Expands

Markit Economics will say its U.S. manufacturing index was 54 in December, from an earlier reading of 53.7, according to a Bloomberg News survey of economists. The Institute for Supply Management’s factory index was at 57.5 last month from 58.7 in November, a separate survey showed. Readings above 50 indicate growth.

The Fed will raise borrowing costs in less than eight months, versus a prediction of almost 13 months in October, based on data from Morgan Stanley.

“The dollar is continuing to derive support from the relative outperformance of the U.S. economy and building investor expectations of widening monetary policy divergence between the Fed and other major central banks,” Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a client note today.

Draghi Comments

The euro, which dropped for the past six straight months, extended its decline as Draghi was quoted by German newspaper Handelsblatt as saying the risk that the ECB won’t be able to fulfill its mandate of price stability is higher than it was six months ago.

“We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary,” Draghi was cited as saying.

Euro-area manufacturing expanded less than initially estimated in December, London-based Markit said today, with the final reading of a gauge for the industry at 50.6, below an estimate released on Dec. 16.

The euro has fallen 2.3 percent in the past 12 months, according to Bloomberg Correlation-Weighted Indexes, which track 10-developed nation currencies. The dollar gained 12 percent, while the yen weakened 3.7 percent.

Lithuania became the 19th member of the single European

 currency bloc yesterday.

The Aussie fell toward the weakest level since June 2010 and the kiwi declined as data showed a slowdown in manufacturing in China, the two nations’ largest trading partner.

Chinese Data

The China Federation of Logistics and Purchasing said yesterday its purchasing managers’ index fell to 50.1 in December from 50.3 the previous month. That compared with a median estimate of 50 in a Bloomberg News survey.

Australia’s dollar dropped 0.6 percent to 81.33 U.S. cents and New Zealand’s fell 0.7 percent to 77.41 U.S. cents. The declines were the largest since Dec. 17.

South Korea’s won fell the most since Nov. 28 against the dollar amid concern a weaker yen will reduce the competitiveness of the nation’s exporters.

South Korea’s manufacturing purchasing managers’ index for December rose to 49.9 in December from 49 the previous month, according to data released by HSBC Holdings Plc and Markit Economics.

“The main impact on the Korean won has been the yen, which is weaker,” said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd. “There’s a slight pickup in the PMI, but it’s still below 50.”

The won dropped 0.9 percent to 1,103.44 per dollar. Financial markets are closed today in China, Japan, New Zealand, Philippines, Taiwan and Thailand.

Source: Bloomberg