Investor Alert

Currencies Archives | Email alerts

Dec. 15, 2016, 3:43 p.m. EST

Dollar surges as Fed signals heightened pace of interest-rate hikes

Dollar gains for fifth time of past six session

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    U.S. Dollar Index (DXY) (DXY)
  • X
    WSJ Dollar Index (BUXX)

or Cancel Already have a watchlist? Log In

By James Glynn , Rachel Koning Beals and Ryan Vlastelica


The U.S. dollar rose sharply against its major rivals on Thursday, with the yen hardest hit a day after the Federal Reserve delivered its first interest-rate increase of 2016 and signaled it expects to hike rates in 2017 at a more aggressive pace than anticipated.

The reaction pushed a closely followed U.S. dollar index to its highest levels in more than 13 years, as the currency rose to its highest since February against the yen. The greenback also posted broad gains against the euro and other major rivals.

The ICE U.S. Dollar Index /zigman2/quotes/210598269/delayed DXY -0.04% , which tracks the dollar against a basket of six rival currencies, jumped 1% to 103.18. At its high of the session it rallied to 103.56, a level it hasn’t seen since December 2002. The index rose for its fifth session of the past six, bringing its year-to-date gain to 4.5%. The index is up about 5% since last month’s presidential election.

The WSJ Dollar Index /zigman2/quotes/210673925/realtime XX:BUXX +0.02% rose 0.9% to 93.18, around its highest closing value in more than 14 years.

/zigman2/quotes/210598269/delayed DXY 97.22, -0.04, -0.04%

Fed officials on Wednesday increased the federal-funds rate by a quarter percentage point to between 0.50% and 0.75%, a move consistent with a brightening economic outlook.

The Fed now expects the median fed-funds rate to be 1.4% by the end of 2017, reaching 2.1% at the end of 2018 and 2.9% in 2019. That implies three quarter-percentage-point interest-rate increases in each of the next three years, a faster pace than officials projected in September, when they only saw two rate increases next year.

“As rates rise in one country relative to another, there’s more value in owning assets in that country. That the median Fed official now sees three rate hikes in 2017 rather than two, at a time when peers in other central banks are still very accommodative, that’s certainly going to boost the dollar,” said Brian Daingerfield, a foreign-exchange strategist at RBS.

The dollar climbed as high as ¥118.66 /zigman2/quotes/210561789/realtime/sampled USDJPY -0.1248%  after trading around ¥115 yen ahead of the Fed announcement. It last traded at ¥118.11. The greenback late Wednesday fetched ¥117.04.

The euro /zigman2/quotes/210561242/realtime/sampled EURUSD +0.0269%  traded at $1.0417 compared with $1.0537 late Wednesday. The euro was at its lowest level since 2002, and analysts speculated that the shared currency could reach parity with the dollar.

“Parity isn’t out of the question for sure,” Daingerfield said. “That the euro-dollar will be low is one of our top trades for 2017; we expect it will trade at the low end of a $1-$1.10 range, so parity is absolutely possible.”

Tricky waters: Questions remain about Fed policy. Richard Grace, the global head of currency strategy at the Commonwealth Bank of Australia, said the Fed was navigating its way through some tricky waters. Fed Chairwoman Janet Yellen has acknowledged the potential for stronger GDP growth if big infrastructure spending by the Trump White House occurs, while also acknowledging monetary conditions have tightened in the past month through a higher U.S. dollar and big increases in U.S. bond yields, he said.

There was a fairly uniform rise in U.S. bond yields overnight, with the 10-year yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -1.81% climbing to 2.60% from around 2.44% on the Fed announcement.

“Higher borrowing costs in the U.S. may boost the cost of capital in general considering that the U.S. dollar is the undisputed global reserve currency,” said Ilya Spivak, currency strategist with Daily FX. “This narrative seems to be pushing up yields marketwide, spurring carry-trade demand and weighing on the go-to funding currency.”

Ray Attrill, the global head of currency strategy at National Australia Bank, said “this is what happens when two (interest rate increases) becomes three.”

“Some of the (Fed) members are taking on board the prospect of more growth-supportive and inflationary fiscal policy next year,” Attrill said.

Still, Yellen has indicated that it is too early to make assumptions about what might happen to the world’s largest economy if the budgetary purse strings in Washington are loosened next year, Attrill added.

Traders said they were also on edge about the potential for increased friction between the Fed and Trump.

Yellen had several opportunities to offer critiques of some of the ideas that have been floated for economic policy but refrained from taking the bait. Still, she emphasized the importance of the Federal Reserve’s independence several times.

Read: The Fed is chasing Donald Trump’s tail

BOE on hold: In other action Thursday, the pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.1868%  dropped to $1.2421 from $1.2563 late Wednesday, though it was off its low of the session at $1.2377.

The Bank of England on Thursday left its key interest rate at a record low 0.25%, meeting widely held expectations. The central bank also left unchanged the size of its asset purchase program at £435 billion ($543 billion) and its corporate-bond purchase program at £10 billion. All nine members of the rate-setting board voted to stand pat on policy.

Meanwhile, in other markets, the Australian /zigman2/quotes/210560947/realtime/sampled AUDUSD -0.5830% , Canadian /zigman2/quotes/210561978/realtime/sampled USDCAD +0.2276% and New Zealand /zigman2/quotes/210561726/realtime/sampled NZDUSD -0.6381%  dollars were sharply lower against the greenback.

Click to Play

Janet Yellen sets timeline for rate hikes

Federal Reserve Chairwoman Janet Yellen explains the decision to raise the federal-funds rate by a quarter percentage point, and the expectation for further increases in 2017. Photo: AP

US : U.S.: ICE Futures U.S.
-0.04 -0.04%
Volume: 0.00
Jan. 28, 2022 4:59p
XX : WSJ Index
+0.02 +0.02%
Volume: 0.00
Jan. 28, 2022 5:05p
US : Tullett Prebon
-0.1440 -0.1248%
Volume: 0.0000
Jan. 28, 2022 4:59p
US : Tullett Prebon
+0.0003 +0.0269%
Volume: 0.0000
Jan. 28, 2022 4:59p
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
-0.03 -1.81%
Volume: 0.00
Jan. 28, 2022 4:56p
US : Tullett Prebon
+0.0025 +0.1868%
Volume: 0.0000
Jan. 28, 2022 4:59p
US : Tullett Prebon
-0.0041 -0.5830%
Volume: 0.0000
Jan. 28, 2022 4:59p
US : Tullett Prebon
+0.0029 +0.2276%
Volume: 0.0000
Jan. 28, 2022 4:57p
US : Tullett Prebon
-0.0042 -0.6381%
Volume: 0.0000
Jan. 28, 2022 4:59p

Ryan Vlastelica is a markets reporter for MarketWatch and is based in New York. Follow him on Twitter @RyanVlastelica.

This Story has 0 Comments
Be the first to comment
More News In

Story Conversation

Commenting FAQs »

Partner Center

World News from MarketWatch

Link to MarketWatch's Slice.