The US dollar soared against a basket of trade-weighted peers on Tuesday, edging closer to the 100 mark as a top Federal Reserve official signaled to his colleagues that interest rates should rise sooner rather than later.
The US dollar index advanced 1.2 percent to 98.76, a fresh 12-year high. It was the fourth consecutive advance for the greenback, which continued to take advantage of a plummeting euro and volatile commodity prices.
The euro fell to a new 12-year low on Tuesday and extended its weakness into Wednesday’s Sydney session. The EURUSD was trading at 1.0683 in the Sydney session, declining 0.14 percent.
The greenback has been supported by renewed optimism the Federal Reserve would begin adjusting monetary policy soon. On Monday out-going Fed Bank of Dallas President Richard Fisher said policymakers should begin raising US interest rates soon to facilitate a more gradual rate-hike path.
“The idea that we can substitute a steeper future funds-rate path for an early liftoff seems risky to me,” Fisher said on Monday at Rice University in Houston. “I would rather the FOMC raise rates early and gradually than late and steeply.”
The FOMC, or Federal Open Market Committee, is the central bank’s rate-setting body. It has pledged patience in beginning to lift interest rates amid a volatile global economy and weakening inflation. Fed Chair Janet Yellen testified to Congress last month that the FOMC would not adjust interest rates in the “next few meetings.”
Still, the markets are betting that the Fed will begin raising interest rates by the middle of the year. Another solid month of job creation supported that notion. Employers added 295,000 nonfarm payrolls last month, as the unemployment rate fell to 5.5 percent, the Labor Department confirmed last week. More plentiful jobs and rising consumer confidence are expected to lift consumer spending in the coming months, helping to sustain the recovery.
The FOMC’s next scheduled meetings will be held next week in Washington. While no change to monetary policy is expected, the Fed could drop its pledge for “patience” in its next rate announcement, signaling a renewed openness to considering a midyear rate hike. A revised summary of economic projections will also be released next week, including policymakers’ “dot plot” chart of interest rate expectations.
The US economy expanded just 2.2 percent annually in the fourth quarter, stemming from weaker business inventories and a wider trade deficit. The Commerce Department will report on business inventories on Wednesday.
Based out of Toronto, Canada, Husni Sam Borji is senior macroeconomics analysts who contributes regularly to TradersDNA, where he examines the global financial markets. Husni Sam has authored dozens of government reports and industry whitepapers, as well as thousands of financial articles. Husni Sam holds a BA from the University of Windsor and a Master’s degree in Economic Public Policy from McMaster University.
His expertise includes macroeconomics, fundamental analysis, industry research and global political economy.