The U.S. dollar surged to its highest level in 14 years Thursday, battering emerging-market currencies and pushing the euro closer to parity...
The U.S. dollar surged to its highest level in 14 years Thursday, battering emerging-market currencies and pushing the euro closer to parity after the U.S. Federal Reserve signaled that it expects to raise interest-rates quicker than previously anticipated.
A faster-than-expected rise in U.S. interest rates will fuel the dollar’s rally further into next year, with major consequences for U.S. exporters and Asian economies, analysts say. The WSJ Dollar Index, which measures the U.S. currency against 16 others, was recently up 0.7% to 93, its highest level since 2002. The dollar set a fresh eight-year high against the Chinese yuan.
“The biggest risk at this juncture in our view is that markets get ahead of themselves and push the dollar much stronger in short order, which could cause capital outflows from China to pick up further and once again destabilize the [yuan] and global risk appetite,” said analysts at Goldman Sachs in a research note.
The current leg in the dollar’s stellar rise came after Fed officials said on Wednesday they would increase the federal-funds target rate by a quarter percentage point, to between 0.50% and 0.75%.
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 over each of the next three years, a faster pace than officials projected in September, when they only saw two rate increases next year.
The effects of the strong dollar are already rattling across the wider world. A stronger greenback adds pressure on emerging-market nations like China by making their dollar-denominated debt more expensive to pay back and their asset less attractive to investors seeking yield. Emerging-markets have already faced aggressive selling and outflows since the U.S. election, prompting central banks in China, Malaysia and Mexico to step in to defend their currencies.
The dollar recently rose 0.5% against the Chinese yuan, 0.6% against the Mexican peso and 1.2% against the Malaysian ringgit. Morgan Stanley analysts see South Africa, Indonesia, Mexico, Turkey and Colombia as particularly vulnerable to U.S. interest rates.
Developed-market currencies are also coming under pressure. While the Federal Reserve is tightening monetary policy, rates in Japan and most of Europe remain in negative territory. The European Central Bank and the Bank of Japan are still pursuing massive bond-buying programs.
Rising rates tend to boost domestic currencies as money flows into the local economy seeking the extra yield. Bond buying also tends to depress a currency, by flattening yields and sending investors looking for yield elsewhere.
The dollar recently rose 0.9% to Y118.12, compared with roughly ¥115.0 before the Fed announcement.
Currency strategists at Goldman Sachs believe the yen has further to fall, forecasting an exchange rate of 125 to the dollar in 12 months time, close to the 13-year high of 125.9 reached in mid-2015.
The euro tumbled to its lowest level against the greenback since 2003, dropping 0.9% to $1.0442. The euro could reach parity in the first half of 2017, analysts said.
Société Générale expects the dollar to fall to parity against the euro, “on the combination of an accelerating U.S. economy and rising European political risk,” said Société Générale foreign-exchange analyst Alvin Tan.
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,” Mr. Attrill said.
The dollar has already been rallying since the Nov. 8 U.S. election, as investors bet President-elect Donald Trump’s promises of more expansive fiscal policy will boost U.S. economic growth and inflation.
Richard Grace, the global head of currency strategy at the Commonwealth Bank of Australia, said the Fed is navigating its way through some tricky waters. Fed ChairwomanJanet Yellen has acknowledged the potential for stronger gross domestic product growth if big infrastructure spending by the Trump Administration 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.
via wallstreetjournal
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