No end in sight to Obama dollar rally

US dollars are counted out by a banker counting currency at a bank in Westminster, Colorado on Nov 3, 2009.
US dollars are counted out by a banker counting currency at a bank in Westminster, Colorado on Nov 3, 2009.PHOTO: REUTERS

US dollar likely to end year on a high, backed by Fed’s plan to continue raising interest rates

NEW YORK • The dollar has an opportunity to make history this year. After three straight years of gains, strategists are forecasting the US currency will be a world beater again this year, strengthening against seven of 10 developed-world peers by the end of the year, according to the median estimate in a Bloomberg survey.

That outlook is backed by the Federal Reserve's stated intent to continue raising interest rates while peers in the rest of the world keep them flat or lower.

The rally that started during President Barack Obama's second term is poised to join a category defined by only the biggest, most durable periods of dollar strength since the currency's peg to gold ended in 1971. Of the two other rallies that share that distinction, during the terms of presidents Ronald Reagan and Bill Clinton, neither stopped at four years.

"This is the third big dollar rally we've had," said Mr Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. "The Obama dollar rally, I think, is being fuelled by the divergence in monetary policy."

The US currency will end this year higher against its major counterparts except the Canadian dollar, British pound and the Norwegian krone, posting its biggest gains against the New Zealand and Australian dollars and the Swiss franc, according to forecasts.

That comes after three straight years of gains for the US Trade Weighted Real Broad Dollar Index, a monthly weighted average of the dollar against the currencies of its main trading partners compiled by the Fed back to 1973, two years after president Richard Nixon made the greenback a freely floating currency by ending its convertibility to gold. The only other two comparable dollar rallies were in the 1980s and the 1990s.

The currency had six straight years of gains from 1979 to 1984 as Mr Reagan took office in 1981 and cut taxes while the Fed raised interest rates. Then, between 1996 and 2001, it rose for five out of six years as the US economy grew under Mr Clinton.

"Dollar trends tend to last for years and years," said Mr Greg Anderson, global head of foreign exchange strategy in New York at Bank of Montreal. "You still have to respect the trend."

The current rally kicked off in 2013 when the Fed began winding down the extraordinary monetary stimulus it had in place since the 2007–2009 recession, stoking speculation that higher interest rates would follow.

Last month, those higher rates finally came as the Fed bumped up borrowing costs a quarter of a percentage point for the first time in almost a decade, and released forecasts implying four similar increases next year as economic growth continues.

"No other country can keep up with that," Mr Chandler said. "Therefore, the dollar is likely to appreciate against most of those currencies."

BLOOMBERG

A version of this article appeared in the print edition of The Sunday Times on January 03, 2016, with the headline ''. Print Edition | Subscribe