US Dollar Approaches 14-Year Peaks After Indications of Fed Rate Hikes

The US Dollar is all set to finish 2016 in a big way, surging ahead this week to approach 14-year highs against a basket of currencies including the euro. The big gains have come in anticipation of increased rate hikes by the U.S. Federal Reserve. The dollar has been on an upward climb ever since Donald Trump was elected to the post of the US President in an election that has shocked the world. A hawkish Federal Reserve will definitely be good for US business interests, and the market is responding accordingly.

President Elect Trump has made clear his intention to take steps to revitalize the US economy, and people expect his administration to launch a number of stimulus policies that will include increasing inflation rates. The Federal Reserve increased interest rates by a substantial degree on Wednesday, and the 25 basis point hike was exactly what the industry was looking forward to. In fact, there are indications that the Fed is firmly committed to this path with three hikes likely in 2017 instead of two. Moreover, most investors have been taken aback by the rapid pace at which the rates have risen and they have consequently shown interest in it.

The US dollar increased 0.1% against the Japanese yen to touch 118.33, after initially reaching 118.66. The dollar has increased by 2.6% for the week, and has been at its highest levels since February this year. With the currency on a firm upward trend, it is clearly heading towards 120 by the end of the year.

Kaneo Ogino, director at Tokyo-based foreign exchange research company Global-info Co admitted that a number of Japanese commercial accounts did not expect the results of the November 8th election and the subsequent surge in the dollar’s value. These companies haven’t yet covered their dollar positions and are now busy reworking their estimates for the dollar versus the yen for the coming year.

The dollar index rose 0.2% against a basket of six major currencies to touch 103.210 on Thursday, after initially jumping to 103.56. Furthermore, the currency showed an increase of 1.6% for the week.

During the same period, the euro declined 0.1% against the dollar to $1.0408, a climb from Thursday’s $1.0366. Overall, the Euro declined 1.4% for the week. The Pound Sterling plummeted against the dollar, touching a three-week low. It was down 1.3% for the week, dropping to $1.2415. Incidentally, the British economy is expected to experience a jump in inflation next year thanks to a decision to keep interest rates at 0.25%. The Sterling has seen a steady rise over the past month.

Recently released U.S. inflation data indicates that there was a moderation in consumer prices last month. However, trends show that rents are rising, and this indicates the presence of inflation pressures. All of these trends point towards another set of rate increase in 2017.

A study of Fed funds futures indicates that investors were anticipating a 40% probability of a rate increase subsequent to the Fed’s meeting in March 2017. There are also indications of 50% probability of tightening measures in May.

Another likely reason for the dollar’s sudden rise is the expectation that the new administration would put economic plans in place to make best use of the Fed’s proposal of increasing rates rapidly. Chapdelaine Foreign Exchange’s New York-based managing director Douglas Borthwick pointed out that there is worldwide expectation that the Trump administration and the Fed will both be good for business, because of which the dollar would continue to strengthen. However, it remains to be seen, as Mizuho Corporate Bank currency strategist Sireen Harajli pointed out, whether the new administration would actually live up to its promises regarding economic policy.