Dollar Gains as Central Banks Give Investors Green Light to Buy

London (Oct 30)  Central banks around the world are giving investors the green light to buy the dollar, pushing it to a three-week high against its major counterparts after the Federal Reserve ended its bond-purchase stimulus program.

The greenback gained versus 14 of its 16 major peers as the Federal Open Market Committee yesterday dismissed recent turmoil in global markets and focused instead on “solid” U.S. employment gains. The euro, set for its biggest annual drop since 2005, slid before a report tomorrow that analysts said will show inflation remained below the European Central Bank’s target. Norway’s krone reached the lowest since 2009 and the yen weakened before a Bank of Japan policy meeting tomorrow.

“Markets are moving back toward trading that theme of monetary-policy divergence” and pushing the dollar higher, said Peter Dragicevich, a currency strategist at Commonwealth Bank of Australia in London. “The Fed has surprised relative to the dovish expectations going into the meeting and is clearly looking toward policy normalization.”

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, advanced 0.2 percent to 1,071.54 at 6:46 a.m. New York time after being at 1,073.85, the strongest since Oct. 6. The dollar added 0.4 percent to $1.2585 per euro after appreciating to $1.2556, also the strongest level since Oct. 6.

The greenback rose 0.1 percent to 109.02 yen after touching 109.31, the highest since Oct. 6. Japan’s currency appreciated 0.2 percent to 137.24 per euro.

Fed Bets

The Fed said the U.S. labor market has strengthened enough to withstand an end to its quantitative easing program and downplayed risks posed by slowing inflation. Odds of Fed borrowing costs going up by October 2015 climbed to about 75 percent yesterday, based on futures prices.

The prospect of tighter policy in the U.S. just as central banks including the ECB and Sweden’s Riksbank loosen theirs to avert deflation has propelled the U.S. currency higher. The dollar has climbed versus all of its 16 major counterparts this year. Its gains for 2014 range from 0.6 percent versus the won to 13 percent against Sweden’s krona.

“Overall the FOMC statement appears consistent with our view that the Fed will begin to raise rates from the middle of next year,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a note to clients today. “The dollar should now continue to trade on a stronger footing in the near-term.”

Dollar Index

The Bloomberg dollar index dropped earlier this month on concern slowing global growth would spill over into the U.S., prompting traders to push out their bets on the timing of the Fed’s rate increase. Policy makers have kept their key interest rate at zero to 0.25 percent since December 2008.

Consumer prices in the euro area rose an annualized 0.4 percent in October, the European Union’s statistics office in Luxembourg will say tomorrow, according to the median estimate of economists in a Bloomberg News survey. In addition to cutting interest rates to record lows and offering long-term loans to banks, the ECB started buying covered bonds this month as it seeks to steer inflation back toward its goal of just under 2 percent.

The ECB’s stimulus contributed to an 8.4 percent depreciation of the euro against the greenback this year, set for the biggest annual decline since it slumped 13 percent in 2005. The common currency will probably drop to $1.20 in the third quarter of 2015, said CBA’s Dragicevich.

Krone Declines

Norway’s krone declined for a third day, slipping 0.2 percent to 6.7241 after being as weak as 6.7402. It slid yesterday as reports showed retail sales unexpectedly contracted in September while the unemployment rate rose in August more than economists predicted.

Sweden’s currency slumped this week after the Riksbank cuts its main rate to zero. The krona fell 0.1 percent today to 7.3726, having been at 7.4063, the weakest since August 2010.

The kiwi was little changed at 78.09 U.S. cents after sliding 1.5 percent yesterday, its biggest drop since Oct. 3.

Reserve Bank of New Zealand Governor Graeme Wheeler held the cash rate at 3.5 percent today and signaled the central bank will keep it on hold for an extended period as inflation slows and the currency remains unjustifiably high. The RBNZ also revealed today it sold a net NZ$30 million last month.

Three of 32 economists surveyed by Bloomberg News this month predicted the Bank of Japan would expand asset purchases at a meeting tomorrow, while 19 forecast action at a later date, and 10 didn’t foresee any increase of stimulus. The central bank buys about 7 trillion yen of bonds each month as it targets inflation of 2 percent.

Source: Bloommberg