The US dollar climbed as robust employment gains fueled speculation the Federal Reserve would increase interest rates this year while its global counterparts boosted monetary stimulus.
While policymakers in Europe and Japan buy bonds to stimulate growth and inflation, futures prices show increased chances the Fed will boost borrowing costs as early as June, adding to the allure of the US currency. The greenback advanced against the yen by the most in nine weeks as US jobs gains last month capped the biggest three-month gain in 17 years.
“The dollar strength will simply amplify by mid-year,” bolstered by a stronger economy, diverging central bank policies and inflationary pressures, said Jennifer Vail, head of fixed-income research at US Bank Wealth Management, which manages US$122 billion in assets.
The US currency gained 1.4 percent to ￥119.12 this week in New York. It was little changed versus the euro, which stood at US$1.1316.
Hedge funds and other large speculators increased net positions that profit from a gain in the US dollar against euro to the most since June 2012, according to data as of Feb. 3 from the Commodity Futures Trading Commission.
FED WATCH
Federal fund futures give a 27 percent chance the central bank will lift rates at its policy meeting in June, according to Bloomberg data.
That is up from 18 percent on Thursday. The central bank has held rates at virtually zero since December 2008 to support the economy.
“It puts the Fed rates in contrast with the expectations of the European Central Bank, the banks of Japan and China that are trying to stimulate growth and fight against deflation,” Alfonso Esparza, senior currency analyst at Oanda Corp, said by telephone from Toronto. “It’s a very clear case of rate divergence.”
US employers hired 257,000 workers in January, exceeding estimates in Bloomberg News survey of economists. The increase in December was also revised higher.
The euro slid for a seventh month in January after the European Central Bank announced a 1.1 trillion euro (US$1.3 trillion) stimulus plan. The Bank of Japan buys as much as ￥12 trillion (US$100 billion) a month.
YIELD DIFFERENCE
The Treasury 10-year note yields almost 1 percentage point more than the average of similar maturity debt issued by G7 peers, the most since the start of the year, according to data compiled by Bloomberg.
“The divergence between the strength of the euro zone economy and the US economy is going to push the euro down more,” Vail said.
The euro will probably stay in the US$1.10 to US$1.15 range while Greece and the ECB negotiate the nation’s debt arrangements, Douglas Borthwick, the head of foreign exchange at New York brokerage Chapdelaine & Co, said by telephone.
Newly elected Greek officials are seeking relief from anti-austerity policies, while European officials led by Germany work to maintain financial discipline.
The British pound had its biggest weekly gain in a year and UK government bonds slid on evidence of an improving British economy.
With manufacturing and construction expanding at a faster pace than economists forecast, and house prices jumping, Citigroup Inc’s gauge of UK economic surprises climbed to the highest level since April last year.
Protracted deliberations in the eurozone over Greece’s debt enhanced the allure of sterling as an alternative to the common currency.
The pound’s gains may have been greater still, but for the report on Friday that showed the US economy added more jobs in January than analysts forecast.
“Some of the pessimism toward the UK economy at the end of last year seemed to have eased as recent data suggested the recovery here is solid,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd in London. “The pound should remain supported, especially against the euro.”
The UK currency rose 1.2 percent last week to US$1.5244 as of 5:02pm in London on Friday, its biggest gain since February last year.
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