The US dollar marched higher on Thursday, reaching its strongest level against the euro for more than a decade, after the US Federal Reserve signalled a more aggressive outlook for interest rate policy.
Europe’s single currency was among the hardest hit, falling through the $1.04 level to trade at its lowest level since early 2003.
Driving the dollar’s strength is a growing divergence between benchmark interest rates across the developed world in favour of the global reserve currency. The price of gold slumped to a 10-month low and the precious metals gain for the year stands at 5.8 per cent, a drop of 18 per cent from its peak in July.
With the yield on two-year German paper at minus 0.76 per cent, the policy-sensitive US debt of equivalent maturity 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.
Japan’s yen weakened beyond ¥118, helping the dollar index to break 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 nearly 5 per cent as investors anticipate firmer US growth from proposed fiscal stimulus measures, that ultimately spurs higher inflation and a faster pace of tightening from the US central bank.
More sceptical about the dollar’s path was Jane Foley, forex strategist at Rabobank, who believed the Trump fiscal timetable may lag and was concerned about the president-elect’s protectionist policy as well a shake-up in Fed membership.
“Optimism about Trump’s fiscal plans could keep the dollar underpinned in the initial months of the year and a more moderate reality could counter enthusiasm for the dollar from the middle of 2017,” said Ms Foley.
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.
“The [Fed’s] real message was delivered by the ‘dot plot,’ which moved unmistakably in the hawkish direction for 2017,” said Richard Clarida, global strategic adviser at Pimco.
While many central banks around the world remain committed to monetary stimulus, the era of ultra-low bond yields is seen by some as coming to an 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 9 basis points to 0.38 per cent, with France’s equivalent maturity bonds up 9bp and Italian yields gaining 8bp. The UK’s benchmark 10-year debt yield reached 1.5 per cent, up 12 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.
Reporting by Michael Mackenzie, Katie Martin, Elaine Moore and Roger Blitz
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