The dollar reached a 14-month high after Federal Reserve officials raised their median estimate for the target rate on overnight loans between banks at the end of 2015 while maintaining guidance to keep borrowing costs low.
The greenback rose versus most of its 16 major peers after Fed officials raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June. The pound gained before Scotland votes on independence tomorrow, and the Aussie fell amid speculation on the economy in China, the nation’s biggest trade partner.
“Getting from zero to 1.375 percent, you’re talking about some aggressive tightening that’s going to happen,” said Roger Bayston, senior vice president and director of fixed income at the Franklin Templeton fixed-income group, in a phone interview. “Any increase in the Fed outlook for the fed funds rate should certainly be positive for the dollar.”
The Bloomberg Dollar Spot Index climbed 0.6 percent to 1,053.36, the highest level since July 2013, at 3:29 p.m. New York time. It fell 0.1 percent earlier. The gauge tracks the greenback against 10 major currencies.
The pound gained versus most major currencies before the referendum tomorrow on Scotland’s independence from the U.K. Sterling was also supported by minutes of the Bank of England’s most recent policy meeting that showed two members voted for a second month to raise interest rates. The U.K. jobless rate fell to 6.2 percent, the lowest in six years.
The British currency appreciated 0.6 percent to 79.17 pence per euro. It gained as much as 0.5 percent to $1.6358 before trading little changed at $1.6269.
Australia’s dollar weakened versus most major peers amid speculation over whether China is taking steps to stimulate economic growth. The People’s Bank of China is providing 500 billion yuan ($81.4 billion) of liquidity to the country’s five biggest banks, the news website Sina.com reported yesterday. It cited banking analyst Qiu Guanhua at Guotai Junan Securities Co.
“There seems to be a great deal of debate over whether that’s an attempt to stimulate the economy or just liquidity management,” said Sean Callow, a strategist at Westpac Banking Corp. in Sydney. Today’s declines in the Australian currency “are very much driven by a growing view that there has been no substantive change in Chinese monetary policy.”
The Aussie slid as much as 1.3 percent, the biggest intraday drop since January, to 89.78 U.S. cents.
The Federal Open Market Committee said the economy is expanding at a moderate pace and inflation is below its goal. It retained a commitment to keep interest rates near zero for a “considerable time” after winding down a bond-purchase program under the quantitative-easing stimulus strategy.
Policy makers tapered monthly bond buying to $15 billion in their seventh consecutive $10 billion cut, staying on course to end the program in October.
The central bank’s rate guidance is “highly conditional” and remains linked to conditions in the economy, Fed Chair Janet Yellen said at a press conference after the meeting. Officials don’t want to be “locked into” a calendar pledge, she said.
Yellen and her colleagues are debating how much longer to keep interest rates at almost zero as they get closer to their goals for full employment and stable prices.
The odds the central bank will increase its benchmark interest-rate target to at least 0.5 percent by July 2015 were 57 percent, up from 48 percent a month ago, federal fund futures showed.
An interest-rate increase would be the first since 2006. The rate has been in a range of zero to 0.25 percent since December 2008.
Foreign-exchange market volatility increased to a five-month high before the Fed meeting. JPMorgan Chase & Co.’s Global FX Volatility Index reached 7.65 percent on Sept. 15, the highest on a closing basis since April 1. The gauge declined to 7.33 percent today.
Policy makers said in a statement that while conditions in the labor market improved, “significant underutilization of labor resources” remains.
Unemployment (USURTOT) fell to 6.1 percent in August from 7.2 percent a year earlier, in part because people have dropped out of the labor force. Yellen has focused on broader measures of job-market health, such as the share of the jobless who have been out of work for 27 weeks or longer, which stands at 31 percent, compared with an average of 19 percent from 2004 to 2007.
The dollar dropped earlier after a report showed U.S. consumer prices unexpectedly fell last month for the first time in more than a year, declining 0.2 percent from July.