US Dollar hits 14-year high as US outlook strengthens

Frankfurt (Dec 15)  The US dollar hit its highest levels in 14 years on Thursday as investors took their lead from a hawkish Federal Reserve in pricing in a stronger US economy under Donald Trump.

The rise in the dollar index pushed the euro to its lowest level in more than a decade and roiled emerging markets, which had been enjoying a strong recovery until Mr Trump’s election victory.

The US currency and global stock indices both rose in response to Wednesday’s signal that several Fed policymakers were ready to tighten more forcefully than the market had expected if the president-elect’s promised stimulus plan stokes US inflation and economic activity.

Europe’s single currency was among the hardest hit, falling through the $1.04 level to trade at its lowest level since 2003, as the appeal of higher US Treasury yields boosted the allure of the dollar. Emerging market stocks suffered their greatest losses since the immediate aftermath of November’s US election, and half a dozen emerging market currencies dropped more than 1 per cent.

The growing divergence between benchmark interest rates across the developed world in favour of the global reserve currency has driven the dollar higher and weighed on commodities. The price of gold slumped to a 10-month low on Thursday, taking the precious metal’s losses from a July peak to 18 per cent.

“The market is getting the idea that the Fed is serious and accepting that we have this handover from monetary policy to fiscal policy,” said Nick Gartside.

“The signal that Janet Yellen sent was a little more hawkish than the market is used to,” added Dan Ivascyn, Pimco’s chief investment officer. “Investors are right in thinking there is more uncertainty around Fed policy.”

This week’s increase in borrowing costs comes across as premature

With the yield on two-year German paper at minus 0.76 per cent, the policy-sensitive US debt of equivalent maturity has neared 1.30 per cent. That pushed the gap between the two benchmarks out to 207 basis points, the widest since early 2000, bolstering the dollar across foreign exchange.

‘’Many will only see the Fed’s hand in this,’’ said Marc Chandler, strategist at Brown Brothers Harriman, who noted that year end financing pressures would help keep the German two-year yield near a record lows of minus 0.8 per cent.
In turn, the euro has broken below its March 2015 low, when traders anticipated that the start of Quantitative Easing by the European Central Bank would pull the single currency towards parity versus the dollar.

“Parity doesn’t look ambitious now,” Mr Gartside said.

Japan’s yen weakened beyond ¥118, lifting the dollar index above 103, its highest reading since 2003. Emerging market currencies felt the force of the dollar’s rise, the renminbi falling to its lowest level in more than eight years, while there were big falls in Brazil’s real, the South African rand and the Mexican peso.

In the wake of Donald Trump’s election victory, the dollar index has gained more than 5 per cent as investors anticipate firmer US growth from proposed fiscal stimulus measures. Those measures may ultimately spurs higher inflation and a faster pace of tightening from the US central bank.

Mr Ivascyn warned that investors the incoming Trump administration had yet to weigh in on the rapidly appreciating dollar, which could prompt a sharp reversal in the dollar.

“The quicker the dollar strengthens, the more destabilising that is and that could be addressed with statements from policymakers that could create even more volatility,” he said.

While the Fed and markets await details of stimulus measures that will be passed by Congress at some point next year, the upward revision of the central bank’s dot plot — a summary of projections by individual policy officials — was the main message for currency and bond traders.

Fed funds futures showed that traders are now betting on a faster tightening by the US central bank, falling closer into alignment with the Fed’s own forecasts.

While many central banks around the world remain committed to monetary stimulus, the era of ultra-low bond yields is seen by many investors as nearing its end.

Developed market central banks are starting to believe that ultra-low interest rates over long periods of time “hold little utility for supporting growth in the real economy,” said Rick Rieder, chief investment officer of fundamental fixed income at BlackRock, who noted that the Fed’s move held no surprises for investors.

Selling of debt in the UK and eurozone was concentrated in the 10-year sector on Thursday. Germany’s 10-year Bund yield rose 6 basis points to 0.36 per cent, with France’s equivalent maturity bonds up 4bp and Italian yields gaining 8bp. The UK’s benchmark 10-year debt yield neared 1.5 per cent, up 10 basis points, a level they have not consistently held since May, before the Brexit vote sent them sliding.

The only big exception to Europe’s bond sell-off was Greece, where yields slipped after shooting up more than 30 basis points on Wednesday afternoon after EU creditors shelved plans to award short-term debt relief to the country.

Source: FinancialTimes