Dollar Climbs to 13-Month High Against Yen on Fed Rate Outlook
The dollar climbed to a 13-month high against the yen this week and the strongest since November versus the euro as signs the U.S. economy is quickening cooled speculation the Federal Reserve will lower interest rates.
Traders bought the U.S. currency after U.S. retail sales gained and the trade deficit shrank to the smallest since 2005. The dollar also advanced after Fed officials signaled inflation remains a threat and growth will pick up.
``The U.S. economy is still in pretty good shape, which casts doubt on a rate cut,'' said Boris Schlossberg, senior currency strategist at Forex Capital Markets LLC in New York. It ``points to further dollar strength.''
The dollar rose 1.4 percent this week to 120.32 yen, and reached 120.74 yen, the strongest since December 2005. It advanced 0.6 percent to $1.2923 per euro, and touched $1.2868 yesterday, the strongest since Nov. 24.
The U.S. currency has rebounded to the range it held from April 27 through Nov. 24, of $1.2405 per euro to $1.2979 per euro. The euro has fallen from a 20-month high of $1.3368 last month.
The British pound surged 2.2 percent against the euro this week, the most in 19 months, after the Bank of England unexpectedly raised its benchmark rate to a five-year high of 5.25 percent. None of the 52 economists Bloomberg surveyed had forecast a rate boost.
Passing the Baton
The Fed has left its benchmark unchanged since lifting it to 5.25 percent in June, after two years of rate boosts. The Bank of Japan's key rate is 0.25 percent after a quarter- percentage-point increase in July, the first in almost six years. The European Central Bank kept its target at 3.5 percent this week after lifting it six times in the past 13 months.
Interest-rate futures show traders see a 6 percent chance the Fed will cut its target overnight lending rate between banks in March, down from a 100 percent likelihood seen last month. The Fed next sets rates on Jan. 31.
``It's very much building to this view that the cyclical baton will pass back to the U.S. and that will be very dollar bullish,'' said Steven Saywell, chief currency strategist at Citigroup Inc. in London.
The yield premium on U.S. 10-year Treasuries over comparable-maturity Japanese government debt widened to 3.04 percentage points yesterday, the highest since Dec. 25. A widening gap boosts the appeal of dollar-denominated assets.
`Rather Strong' Growth
U.S. retail sales rose 0.9 percent in December, from 0.6 percent in November, the Commerce Department said yesterday. The median forecast of economists polled by Bloomberg News was for an increase of 0.7 percent. Spending by consumers accounts for about two-thirds of the U.S. economy.
The trade gap, the amount by which imports exceed exports, fell to $58.2 billion in November, the smallest since July 2005, from $58.8 billion in October, the government said this week.
``U.S. economic growth is looking rather strong,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``Expectations for a Fed rate cut may recede.''
Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. were among securities firms to lift estimates yesterday for U.S. economic growth last quarter.
Goldman Sachs, the biggest U.S. securities firm, and Lehman Brothers, the fourth-biggest U.S. securities firms, raised their predictions for the gross domestic product growth to 3.3 percent, from 2 percent.
`Too Early'
Fed President Cathy Minehan said yesterday economic growth is poised to accelerate this year and inflation remains ``a challenge.''
Chicago Fed President Michael Moskow this week said further rate increases ``certainly'' may be needed; Dallas Fed President Richard Fisher said inflation has been ``too high.'' Fed Vice Chairman Donald Kohn this week said it's ``still too early'' for the central bank to relax its guard on inflation.
The U.S. consumer price index may have risen 0.4 percent in December after being flat in November, according to the median forecast in a Bloomberg survey. The data is scheduled for release Jan. 18.
The dollar pared its weekly gain against the euro yesterday after traders said central banks bought euros when the 13-nation European currency fell to its 100-day average of about $1.2876.
There was ``no follow-through to buy the dollar,'' said Steven Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto. ``The euro has support at the 100-day moving average,'' adding that there was ``sovereign'' buying of euros at about that level.
Traders bought the U.S. currency after U.S. retail sales gained and the trade deficit shrank to the smallest since 2005. The dollar also advanced after Fed officials signaled inflation remains a threat and growth will pick up.
``The U.S. economy is still in pretty good shape, which casts doubt on a rate cut,'' said Boris Schlossberg, senior currency strategist at Forex Capital Markets LLC in New York. It ``points to further dollar strength.''
The dollar rose 1.4 percent this week to 120.32 yen, and reached 120.74 yen, the strongest since December 2005. It advanced 0.6 percent to $1.2923 per euro, and touched $1.2868 yesterday, the strongest since Nov. 24.
The U.S. currency has rebounded to the range it held from April 27 through Nov. 24, of $1.2405 per euro to $1.2979 per euro. The euro has fallen from a 20-month high of $1.3368 last month.
The British pound surged 2.2 percent against the euro this week, the most in 19 months, after the Bank of England unexpectedly raised its benchmark rate to a five-year high of 5.25 percent. None of the 52 economists Bloomberg surveyed had forecast a rate boost.
Passing the Baton
The Fed has left its benchmark unchanged since lifting it to 5.25 percent in June, after two years of rate boosts. The Bank of Japan's key rate is 0.25 percent after a quarter- percentage-point increase in July, the first in almost six years. The European Central Bank kept its target at 3.5 percent this week after lifting it six times in the past 13 months.
Interest-rate futures show traders see a 6 percent chance the Fed will cut its target overnight lending rate between banks in March, down from a 100 percent likelihood seen last month. The Fed next sets rates on Jan. 31.
``It's very much building to this view that the cyclical baton will pass back to the U.S. and that will be very dollar bullish,'' said Steven Saywell, chief currency strategist at Citigroup Inc. in London.
The yield premium on U.S. 10-year Treasuries over comparable-maturity Japanese government debt widened to 3.04 percentage points yesterday, the highest since Dec. 25. A widening gap boosts the appeal of dollar-denominated assets.
`Rather Strong' Growth
U.S. retail sales rose 0.9 percent in December, from 0.6 percent in November, the Commerce Department said yesterday. The median forecast of economists polled by Bloomberg News was for an increase of 0.7 percent. Spending by consumers accounts for about two-thirds of the U.S. economy.
The trade gap, the amount by which imports exceed exports, fell to $58.2 billion in November, the smallest since July 2005, from $58.8 billion in October, the government said this week.
``U.S. economic growth is looking rather strong,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``Expectations for a Fed rate cut may recede.''
Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. were among securities firms to lift estimates yesterday for U.S. economic growth last quarter.
Goldman Sachs, the biggest U.S. securities firm, and Lehman Brothers, the fourth-biggest U.S. securities firms, raised their predictions for the gross domestic product growth to 3.3 percent, from 2 percent.
`Too Early'
Fed President Cathy Minehan said yesterday economic growth is poised to accelerate this year and inflation remains ``a challenge.''
Chicago Fed President Michael Moskow this week said further rate increases ``certainly'' may be needed; Dallas Fed President Richard Fisher said inflation has been ``too high.'' Fed Vice Chairman Donald Kohn this week said it's ``still too early'' for the central bank to relax its guard on inflation.
The U.S. consumer price index may have risen 0.4 percent in December after being flat in November, according to the median forecast in a Bloomberg survey. The data is scheduled for release Jan. 18.
The dollar pared its weekly gain against the euro yesterday after traders said central banks bought euros when the 13-nation European currency fell to its 100-day average of about $1.2876.
There was ``no follow-through to buy the dollar,'' said Steven Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto. ``The euro has support at the 100-day moving average,'' adding that there was ``sovereign'' buying of euros at about that level.
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