The dollar hit a fresh 14-year high on Tuesday, boosted by upbeat comments from Federal Reserve chair Janet Yellen that kept alive market expectations for swifter US interest rate hikes next year than had been expected. The euro fell to its lowest level against the US currency since 2003, falling 0.5 per cent to $1.0355. It recovered somewhat in later trade to around $1.039 in late US trading
The dollar climbed broadly but its gains were strongest against the yen, which slid as much as 1 per cent after the Bank of Japan kept monetary policy unchanged.
Yellen said late on Monday that the US labour market had improved to its strongest in almost a decade, suggesting wage growth was picking up.
The Fed chair did not mention monetary policy, but some analysts said the fact that she did not pour cold water on investors’ moves to price in a possible three rate hikes in 2017 after the Fed’s policy statement and rate rise last week was a catalyst for dollar strength.
Fiscal spending
“She didn’t use the opportunity to take the market back from being overly hawkish,” said UBS currency strategist Constantin Bolz in Zurich. “Maybe there were some people who . . . thought they would hold off from further dollar longs until she spoke, in case she were to row back.”
The euro’s drop has opened up the door to a move to parity with the dollar.Expectations that US president-elect Donald Trump’s administration will go ahead with tax cuts and fiscal spending, leading to higher US growth and inflation, have lifted US bond yields and the dollar in the past six weeks, in what has become known as the Trumpflation trade.
“The market is still playing this prospect of [policy] normalisation and, as long as this is the case, the dollar will remain strong or even appreciate a little further,” said Commerzbank currency strategist Thu Lan Nguyen in Frankfurt.
Analysts said the yen was the most obvious play against the dollar in the Trumpflation trade because the Bank of Japan was the central bank that looked furthest away from normalising its policy settings.
