The US dollar extended its biggest advance since January to a third week as traders weighed the possibility of tighter monetary policy in the US against stimulus in Japan and other major economies.
The US currency has rallied since the minutes of the US Federal Reserve’s most recent meeting prompted traders to add to bets on a rate hike next month.
The move was also spurred by Bank of Japan Governor Haruhiko Kuroda reiterating that he is ready to add to stimulus if necessary.
Japan used a meeting of finance chiefs from the world’s major industrialized nations to warn of the economic risks from sharp swings in the yen, even as the US made clear that currency markets remain calm.
The greenback surged for the past three weeks in its longest run of gains since January as traders renewed expectations for the US central bank to raise borrowing costs. The currency’s rebound snapped three months of losses, during which markets questioned the Fed’s ability to tighten monetary policy amid a softening global growth outlook.
“The definition of divergence has really changed,” said Steven Englander, New York-based global head of G10 currency strategy at Citigroup Inc, the world’s biggest currency trader.
“Last year, we thought divergence was four hikes a year for the Fed, now it’s like two hikes, maybe,” he said in an interview on Bloomberg Television.
He expects the dollar to strengthen when the Fed raises rates.
The Bloomberg Dollar Spot Index, which tracks the US currency versus 10 major counterparts, gained 0.8 percent this week as of 5pm in New York, adding to the 2.3 percent advance in the past two weeks. The dollar rose 0.2 percent to ¥110.15 on Friday and slipped 0.2 percent to US$1.1224 per euro.
The yield premium offered by two-year US Treasury notes over equivalent Japanese government bonds surged to the highest since the 2008 financial crisis.
The British pound briefly lost its tag of the year’s worst-performing G10 currency, though by Friday afternoon it had resumed that mantle with a loss this year of 1.5 percent that left the pound at US$1.4511 as of 5pm London time.
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