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Dollar Rallies on U.S. Interest-Rate Hopes

04/13/2015 | 11:14am US/Eastern
   By Carolyn Cui 

The dollar climbed in a broad rally Monday on renewed optimism among investors that the Federal Reserve would stay on track to raise interest rates this year.

The dollar's resurgence chalked up big losses against many rivals, with the British pound falling to its lowest level in nearly five years, both the Australian and New Zealand dollar losing more than 1%, and the Turkish lira hitting a record low against the buck.

The dollar's big rally this year had paused in recent weeks, with investors pushing back their expectations of a Federal Reserve rate increase amid some disappointing U.S. economic data. Investors are now betting on a strong reading on March retail sales, which will be released Tuesday.

"The markets have looked past the soft U.S. data and are starting to look further ahead," said Win Thin, a currency strategist at Brown Brothers Harriman & Co. in New York.

The euro closed in on its recent 12-year low of $1.0457 against the buck, rekindling speculations that the dollar is on course to hit parity with the single currency soon. The euro was 0.2% lower against the dollar at $1.0581, having rebounded to more than $1.10 earlier this month. The British pound was down 0.2% to $1.4652, its lowest level since June 2010.

The dollar was also buoyed by optimism that the Fed wouldn't try to weaken the dollar. Chairwoman Janet Yellen's remarks on its negative effects on exports and inflation following the March Federal Open Market Committee meeting had raised doubts about whether the Fed would tolerate a stronger dollar.

But the minutes from the FOMC meeting released last week showed "there were not as many concerns (about the dollar strength) as anticipated," said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. "The markets have been given the green light to further buy the dollar and drive the dollar appreciation further."

Analysts at BNP Paribas said the effects of the European Central Bank's bond-buying program, which has driven down yields on bonds inside the eurozone, is likely to weaken the euro further.

"We expect the negative real yields associated with QE in the eurozone to force eurozone investors increasingly into foreign markets," driving down the currency, they said.

The WSJ Dollar Index, which tracks a basket of currencies, rose 0.14% Monday, after posting a 1.7% gain last week.

Only a few currencies managed to post a gain against the greenback. The Russian ruble was up 1.3%, continuing its rebound against the dollar. The Japanese yen, which had been lifted earlier by a policy adviser's comment, fell back against the dollar. The yen was down 0.01% to 120.207 per dollar. Koichi Hamada, an adviser to Prime Minister Shinzo Abe, earlier said the dollar's current level at 120 yen is too weak for the yen, considering purchasing parity.

Currencies that are regarded "high yielders" were among the biggest losers against the dollar. The Australian dollar and the New Zealand dollar fell 1.3% and 1.2%, respectively, against the dollar to 75.80 cents and 74.40 cents. The Turkish lira dropped 0.8% to an all-time low of 2.6505 per dollar, and the South African rand was down 1.1%.

These currencies have benefited from years of low U.S. interest rates, as their countries' relatively higher rates draw investors. With the prospect of rising interest rates in the U.S., this advantage is diminishing for them, as the dollar emerges as an alternative that not only has higher yields, but is also safer and more liquid, Ms. Nguyen said.

Write to Carolyn Cui ay

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