Dollar rises on Fed's interest-rate outlook

[TOKYO] A gauge of the dollar headed for the highest close on record amid speculation the Federal Reserve is the only developed-nation's central bank considering raising interest rates this year.

The US currency gained versus most of its 16 major counterparts as the Fed maintained its pledge to be "patient" on the pace of future rate gains at a meeting in Washington on Wednesday.

The yen pared declines as a slump in Japanese share prices spurred demand for haven assets. Australia's and New Zealand's currencies weakened amid speculation both nation's central banks may be moving toward cutting interest rates.

Measures of volatility have jumped in currency markets this year as central banks from Canada to Singapore roiled markets with surprise monetary policy easing. The euro plunged last week as the European Central Bank introduced a bond-buying program that was bigger than analysts anticipated, while money markets rates show Bank of England officials, who were last year forecast to increase interest rates before the Fed, will keep UK borrowing costs at record lows this year.

"All roads lead to a higher US dollar," said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney.

"The Fed's the only one that people can see tightening this year."

The Bloomberg Dollar Spot Index, a gauge of the currency's performance against 10 major peers, rose 0.2 per cent to 1,162.33 as of 9:49am in London. It closed at 1,161.42 on Jan 26, the highest in data going back to 2004.

The dollar gained 0.3 per cent to 117.86 yen. The greenback depreciated 0.2 per cent to US$1.1313 per euro. It reached US$1.1098 versus the common currency on Jan 26, the strongest level since September 2003. The yen weakened 0.5 per cent to 133.28 per euro.

The Federal Open Market Committee maintained its pledge to be "patient" on raising interest rates at a two-day meeting that ended Wednesday. Policy makers noted global risks, saying they will monitor "international developments" when deciding how long to keep rates low.

Fed officials have kept their interest-rate target in a range of zero to 0.25 per cent since December 2008. The chance of an increase to at least 0.5 per cent by the Fed's December meeting was 66 per cent, futures data showed, down from 86 per cent at the end of 2014.

The dollar climbed 9 per cent in the last three months, the most after the Swiss franc in a basket of 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen was little changed, while the euro slid 3.6 per cent.

"With central banks everywhere easing or shifting their biases in that direction, markets are highly sensitive to the global risk factors, and what it does translate to is a desire to be in a safe asset such as the US dollar," said Sam Tuck, a senior currency strategist in Auckland at ANZ Bank New Zealand Ltd.

JPMorgan Chase & Co's global gauge of currency price swings climbed to as high as 11.68 percent this month, the most since June 2013, and was 10.85 per cent on Thursday.

The yen pared a decline against the dollar as the Nikkei 225 Stock Average fell 1.1 per cent, the biggest drop in almost two weeks.

The Aussie weakened one per cent to 78.09 US cents and reached 78.07 cents, the lowest since July 2009. Swaps traders see 66 per cent odds the Reserve Bank of Australia will cut borrowing costs on Feb. 3, setting aside the report on Wednesday that showed underlying quarterly inflation accelerated.

New Zealand's dollar slid to the lowest level in almost four years versus the greenback, extending a drop from Wednesday, after the nation's Reserve Bank hinted it is prepared to lower interest rates. The kiwi fell 0.3 per cent to 72.97 US cents, and touched 72.86 cents, the least since March 2011.

BLOOMBERG