Dollar Jumps As Fed Rate Guidance Shows Quiet Confidence In US Economy

The dollar took the upper hand on Thursday after the Federal Reserve signaled it was on track to raise interest rates next year, altering a pledge to keep them near zero for a “considerable time” in a show of confidence in the U.S. economy.

The Fed said it would take a “patient” approach in deciding when to bump borrowing costs higher, guidance which it said is consistent with its previous statement that rates will be low “for a considerable time.”

Fed Chair Janet Yellen told a news conference that the statement meant it was unlikely to hike rates for “at least a couple of meetings,” meaning April of next year at the earliest.

“The markets have had some relief as the Fed is moving forward as planned, but not too fast, in raising rates,” said Takako Masai, the head of market research at Shinsei Bank.

The dollar index .DXY =USD rose to 88.998, almost flat in Asia but having risen 1.0 percent on Wednesday and coming within a striking distance from a near six-year high of 89.550 touched 10 days ago.

Against the yen, the dollar rose to 118.58 yen JPY=, extending its rebound from one-month low of 115.565 hit on Tuesday on fears over falling oil prices and the beleaguered Russian rouble.

“What’s going on is an unwinding of dollar short positions,” said chief trader at a Japanese brokerage. “The global jitters in recent days calmed a bit overnight. The Fed’s statement was also supportive.”

Many market participants expect the dollar to be in a modest uptrend throughout 2015 on the back of firming U.S. economy and interest rate differentials between other major currencies.

But a rapid rise is unlikely, with many speculators heading into holidays with the Fed meeting out of the way.

In addition, possibly curbing the speed of any gains in the dollar, disinflationary pressure from plunging oil prices is manifesting even in the United States, raising doubts on how far the Fed can actually raise rates next year.

Indeed, data showed on Wednesday U.S. consumer prices recorded their biggest drop in nearly six years in November as gasoline prices tumbled.

While Fed officials shrugged off the disinflationary trend as transitory, Fed policymakers’ median forecast of the policy rate at the end of next year was lowered to 1.125 percent from 1.375 percent in September.

“It shows Fed policymakers are becoming less convinced on continued rate hikes. It is questionable how far the dollar can keep rallying,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

Others also worry investors’ dollar buying positions may already be stretched.

“Everyone concludes the same and is betting the same way. As a result, it’s like landmines are everywhere,” said Fumio Nakakubo, chief investment officer for Japan at UBS’s Wealth Management division.

There is little major data in Asia and trading could slowly dwindle as many market players set off for year-end holidays, but traders are keeping an eye on oil prices, the rouble and some other battered emerging market currencies.

The rouble rebounded on Wednesday after dramatic falls on the previous two days as the government pressured exporters not to hoard foreign-currency earnings and the central bank announced new measures to support financial stability.

Oil prices were mixed after wild swings on Wednesday, with U.S. crude futures trading up 0.1 percent at $56.54 per barrel CLc1, off 5-1/2-year low of $53.60 hit on Tuesday.

The euro slipped to $1.2345 EUR= from above $1.25, coming less than a cent away two-year low of $1.2247 hit earlier this month.

The British pound fell to 15-month low of $1.5539 GBP=D4 on Wednesday while the Australian dollar hit a 4 1/2-year low of $0.8107 AUD=D4.

The next focus for the euro is the influential Ifo German business climate survey due at 0900 GMT (04:00 a.m. EST), which is expected to show a small improvement in Europe’s biggest economy.

Source : reuters