US dollar jumps as Fed rate guidance shows quiet confidence in US economy

People gathering near a currency exchange office in Moscow on Dec 17, 2014. The US dollar rose on Thursday after the Federal Reserve signalled it was on track to raise interest rates next year. -- PHOTO: REUTERS
People gathering near a currency exchange office in Moscow on Dec 17, 2014. The US dollar rose on Thursday after the Federal Reserve signalled it was on track to raise interest rates next year. -- PHOTO: REUTERS

TOKYO (REUTERS) - The US dollar took the upper hand on Thursday after the Federal Reserve signalled it was on track to raise interest rates next year, altering a pledge to keep them near zero for a "considerable time" in a show of confidence in the US economy.

The Fed said it would take a "patient" approach in deciding when to bump borrowing costs higher, guidance which it said is consistent with its previous statement that rates will be low "for a considerable time."

Fed chairman Janet Yellen told a news conference that the statement meant it was unlikely to hike rates for "at least a couple of meetings," meaning April of next year at the earliest". The markets have had some relief as the Fed is moving forward as planned, but not too fast, in raising rates," said Mr Takako Masai, the head of market research at Shinsei Bank.

The dollar index rose to 89.109, flat in Asia, having risen 1.0 per cent on Wednesday and coming within a striking distance from a near six-year high of 89.55 touched 10 days ago.

Against the yen, the dollar rose to 118.88 yen, extending its rebound from one-month low of 115.565 hit on Tuesday.

The euro slipped to US$1.2330 from above US$1.25, coming less than a cent away two-year low of $1.2247 hit earlier this month.

The next focus for the euro is the influential Ifo German business climate survey due at 0900 GMT, which is expected to show small improvement in Europe's biggest economy.

The British pound fell to 15-month low of US$1.5539 while the Australian dollar hit a 4 1/2-year low of US$0.8107 .

While the dollar is seen supported by the relative strength of the US economy, disinflationary pressure from plunging oil prices is rearing its head even in the United States, raising doubts on how far the Fed can actually raise rates next year.

Indeed, data showed on Wednesday US consumer prices recorded their biggest drop in nearly six years in November as gasoline prices tumbled While Fed officials shrugged off the disinflationary trend as transitory, Fed policymakers' median forecast of policy rate at the end of next year was in fact lowered to 1.125 per cent from 1.375 per cent in September.

"It shows Fed policymakers are becoming less convinced on continued rate hikes. It is questionable how far the dollar keeps rallying," said Mr Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

The rouble rebounded on Wednesday after dramatic falls on the previous two days as the government pressured exporters not to hoard foreign-currency earnings and the central bank announced new measures to support financial stability.

Oil prices were mixed after wild swings on Wednesday, with U.S. crude futures trading up 0.5 per cent at US$56.76 per barrel, off 5-1/2-year low of US$53.60 hit on Tuesday.