Dollar Rallies on Rate Hike Expectations

        The U.S. dollar started 2015 strongly, with an index tracking its value against a basket of other currencies surging to a nearly nine-year high, Friday, spurred by expectations that the Federal Reserve will raise interest rates this year.
        In early European trade, the ICE dollar index rose as much as 0.5% to touch 90.72--its highest level since March 2006. The euro fell 0.2% to $1.2040, marking its lowest level since June 2010.
        "Economic data flow over the holiday period will have in general reinforced the view that the U.S. economy continues to strengthen which will make the Fed more comfortable to begin raising rates from the middle of this year," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
        "The annual rate of real [gross domestic product] growth is now running at 2.7% and is likely to accelerate further in the coming quarters as economic growth remained strong heading into year-end," he added.
        The U.S. index of consumer confidence increased to a two-month high of 92.6 in December from a revised 91.0 in November, figures showed Tuesday. Consumers are the main driver of economic growth in the U.S., especially in the fourth quarter, when households buy gifts and other items during the year-end holiday season.
        Accentuating the dollar's rally, European Central Bank President Mario Draghi told German daily Handelsblatt in an interview published Friday that interest rates in the currency bloc are set to stay lower for longer.
        He said risks surrounding the central bank's ability to fulfill its price stability mandate have increased over the past six months and noted that medium-term inflation expectations have fallen since June.
        Mr. Draghi said preparations are being met to "alter the volume, tempo, and content of our measures early in 2015, if needed, to respond to a period of inflation that is too low."
        His remarks are likely to fan speculation that the ECB will embark on a sovereign-bond buying program sooner rather than later.
        That spurred fresh demand for Southern European sovereign bonds, sending yields on 10-year debt issued by both Spain and Italy around 0.07 percentage point lower to 1.525% and 1.805%, respectively--both euro-era lows.
        The 10-year German bund yield hovered around 0.54%, close to an all-time low hit last week, after political uncertainty in Greece sparked a hunt for assets deemed most stable during times of heightened volatility. Bond yields fall as prices rise.
        In equity markets Friday, the Stoxx Europe 600 rose 0.3% in early trading, mirroring similar moves on Germany's DAX and France's CAC. All major indexes were shut on Thursday in observance of the New Year's Day holiday.
        Later in the session, purchasing manager index figures are due for the eurozone and the U.K.
        Brent crude, which in 2014 posted its largest annual loss since the global recession in 2008, was little changed on the day at $57.36 a barrel. Gold was marginally higher at $1,185.70 a troy ounce.
        -- Monica Houston-Waesch contributed to this article
        Write to Josie Cox at josie.cox@wsj.com
        Subscribe to WSJ: http://online.wsj.com?mod=djnwires
        (END) Dow Jones Newswires

By Josie Cox 

        The U.S. dollar started 2015 strongly, with an index tracking its value against a basket of other currencies surging to a nearly nine-year high Friday, spurred by expectations that the Federal Reserve will raise interest rates this year.
        In early European trade, the ICE dollar index rose as much as 0.5% to touch 90.72--its highest level since March 2006. The euro fell 0.2% to $1.2040, marking its lowest level since June 2010.
        "Economic data flow over the holiday period will have in general reinforced the view that the U.S. economy continues to strengthen which will make the Fed more comfortable to begin raising rates from the middle of this year," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
        "The annual rate of real [gross domestic product] growth is now running at 2.7% and is likely to accelerate further in the coming quarters as economic growth remained strong heading into year-end," he added.
        The U.S. index of consumer confidence increased to a two-month high of 92.6 in December from a revised 91.0 in November, figures showed Tuesday. Consumers are the main driver of economic growth in the U.S., especially in the fourth quarter, when households buy gifts and other items during the year-end holiday season. On Friday, U.S. stock futures indicated that the S&P 500 would open 0.4% higher. Changes in futures aren't necessarily reflected in market moves after the opening bell.
        Accentuating the dollar's rally, European Central Bank President Mario Draghi told German daily Handelsblatt in an interview published Friday that interest rates in the currency bloc are set to stay lower for longer.
        He said risks surrounding the central bank's ability to fulfill its price stability mandate have increased over the past six months and noted that medium-term inflation expectations have fallen since June.
        Mr. Draghi said preparations are being met to "alter the volume, tempo, and content of our measures early in 2015, if needed, to respond to a period of inflation that is too low."
        His remarks are likely to fan speculation that the ECB will embark on a sovereign-bond buying program sooner rather than later.
        That spurred fresh demand for Southern European sovereign bonds, sending yields on 10-year debt issued by both Spain and Italy around 0.07 percentage point lower to 1.525% and 1.805%, respectively--both euro-era lows.
        The 10-year German bund yield hovered around 0.54%, close to an all-time low hit last week, after political uncertainty in Greece sparked a hunt for assets deemed most stable during times of heightened volatility. Bond yields fall as prices rise.
        In equity markets Friday, the Stoxx Europe 600 rose tentatively in early trading, but reversed those gains to trade 0.4% lower after eurozone manufacturing data came in weaker than expected.
        The manufacturing purchasing managers index for December was revised to 50.6 from a preliminary estimate of 50.8. That still indicates that activity grew at a slightly faster pace than in November, but confirms that the currency area's economy remained weak as 2014 drew to a close.
        "While we are convinced that activity will gradually recover on the back of lower oil prices, these data support the case for more [ECB] monetary policy stimulus," said Luigi Speranza, economist at BNP Paribas.
        He said that he continues to expect the ECB will announce a broader-based asset-purchase program at their meeting on Jan. 22, including sovereign-bond purchases.
        Germany's DAX was down 0.9% by midmorning, while France's CAC lost 0.8% and London's FTSE 100 fell 0.7%. Italy's FTSE MIB index was broadly flat.
        Brent crude, which in 2014 posted its largest annual loss since the global recession in 2008, continued its decline to trade 0.3% lower on the day at around $57 a barrel. Gold was marginally higher at $1,1856 a troy ounce.
        -- Monica Houston-Waesch contributed to this article
        Write to Josie Cox at josie.cox@wsj.com
        (END) Dow Jones Newswires

        January 02, 2015 04:51 ET (09:51 GMT)
        January 02, 2015 04:20 ET (09:20 GMT)


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