The surging US dollar is on the verge of accelerating even more as investors shift their focus to the prospect of higher US interest rates from the catalyst provided by the European Central Bank’s (ECB) bond-buying program.
The greenback is rallying the most since the heart of the European financial crisis five years ago, gaining this week against most major counterparts, including climbing to a 12-year high versus the euro.
Investors are speculating whether the US Federal Reserve will drop a reference to “patience” in its guidance on rates at next week’s policy meeting, suggesting Federal Open Market Committee (FOMC) members may boost borrowing costs for the first time in almost a decade as soon as June.
“After all these years of extraordinary monetary accommodation, which prevented the dollar from trading its true strength, we see the coming normalization of US monetary policy, including at next week’s FOMC, as an important catalyst,” New York-based Goldman Sachs Group Inc chief currency strategist Robin Brooks said in an e-mail on Friday.
The Bloomberg Dollar Spot Index, which tracks the US currency against 10 major counterparts, has rallied 5 percent to 1,222.12 in the past four weeks, the biggest advance since May 2010.
The 8.1 percent surge in the dollar gauge this year demonstrates how the US has become one of the few global hot spots for investors as Europe struggles to avoid deflation, a Chinese slowdown ripples across emerging markets and falling commodity prices prompts nations including Canada and Australia to cut borrowing costs.
The ECB’s 60 billion euro (US$64 billion) a month bond-buying program, which started this week, has investors pouring cash into the US as yields evaporate in Europe.
Strategists are struggling to keep up with the pace of the euro’s decline against the dollar. The single currency slumped 3.2 percent this week to US$1.0496, surpassing the median estimates for the end of the year, according to a Bloomberg survey. Goldman Sachs on Friday brought forward its prediction for parity to the next six months, from the end of next year previously.
Hedge funds and other large speculators increased wagers on the US currency’s strength versus eight major peers to 435,439 contracts as of March 10, the biggest in a month, according to Commodity Futures Trading Commission data compiled by Bloomberg.
“Markets will continue on this one-way bet” on the dollar, said OppenheimerFunds Inc macro strategist Alessio de Longis said in an interview in New York.
De Longis, whose division oversees US$11.6 billion, said the euro may decline to parity with the US dollar in the next six months.
The US currency was little changed at ¥121.41 on Friday. For the week, the greenback has advanced 0.5 percent against the yen.
The British pound declined to the lowest level since 2010 against the US dollar as the rally in the greenback was compounded by concerns over the UK’s political future.
Declines in sterling may have rekindled anxiety over the outcome in May’s UK’s election, which currently seems too close to call, London-based Rabobank International senior currency strategist Jane Foley said.
There is also speculation that the Bank of England may be slower to raise borrowing costs than had been previously thought.
The pound declined from the 2007 high it reached against the euro earlier this week after BOE Governor Mark Carney said that one factor affecting the pace and degree of interest-rate increases was the evolution of the exchange rate.
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