US dollar rises to strongest in over a decade after US Fed again flags December rate rise

US Federal Reserve chair Janet Yellen at an Economic Club of Washington discussion on Dec 2, 2015.
US Federal Reserve chair Janet Yellen at an Economic Club of Washington discussion on Dec 2, 2015.PHOTO: BLOOMBERG

NEW YORK(BLOOMBERG) - The United States dollar rose to the strongest in more than a decade after Federal Reserve chair Janet Yellen said the US economy is ready for an interest-rate increase, echoing her central bank colleagues before they gather in two weeks.

The US currency strengthened against most of its major peers as Ms Yellen said a belated tightening in monetary policy may "inadvertently push the economy into recession", while Fed Bank of Atlanta president Dennis Lockhart said he favours raising interest rates this month for the first time in almost a decade. The dollar pared gains versus the euro in afternoon trading, as investors await the outcome of the European Central Bank meeting on Thursday (Dec 3).

"The Yellen comments made it quite plain that the Fed's going to raise rates," said Mr Douglas Borthwick, head of foreign exchange at New York-based brokerage Chapdelaine & Co. "The dollar, though, may have reached the point where positioning is saturated. It's likely you've already priced in the Fed raising rates and the ECB pushing for more quantitative easing."

The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers, added O.2 per cent to 1,235.81 as of 5 pm New York time, after rising as much as 0.6 per cent to touch the strongest level in more than a decade.

The dollar rose 0.2 per cent to US$1.0615 against the euro after reaching the strongest level since March. The greenback gained 0.3 per cent to 123.24 against the yen.

The Federal Open Market Committee is considering raising borrowing costs at its next meeting on Dec 15-16 as the economy expands and the labour market shows signs of progress.

Yet, officials have warned that the US dollar's appreciation will limit the pace of tightening. 

"Absent information that drastically changes the economic picture and outlook, I feel the case for lift-off is compelling," Mr Lockhart said in the text of remarks on Wednesday in Fort Lauderdale, Florida. "It is possible a greater strength of the dollar is not priced in yet. I am viewing it as a risk to the outlook, but I am not assuming it.''

The Bloomberg Dollar Spot Index has gained 9.3 per cent this year after an 11 per cent increase in 2014.

"We continue to view the overall health of the US economy as very strong," said Mr Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange in Washington. "Today, we revert back to the divergence outlook between the Fed and the ECB."