Dollar climbs to fourteen-month high on possible interest rate hike

On Tuesday the U.S. dollar rose to its highest level in fourteen months against the euro as investors expected the Federal Reserve would increase interest rates soon. These bets lowered bond prices and caused global equity markets to weaken. The dollar's gains came as a result of an indication from research done by economists at the San Francisco Fed that investors had most likely underestimated the pace at which the rate hike by the U.S. central bank would occur, reports Reuters.

The euro approached a key technical level as it recovered after declining to its lowest against the dollar since July 2013. The Colombian peso led the way as emerging-market and commodities currencies fell, followed by the Turkish lira and South African rand, due to the forecasts of an unexpectedly soon rate increase.

Possible rate hikes
The dollar's strength "is going to continue to develop, and the U.S. outlook is just going to continue to improve," Ken Dickson, an Edinburgh-based director for foreign exchange at Standard Life Investments Ltd., which oversees about $314 billion, said in an interview with Bloomberg. 

On Sept. 17, the Fed is scheduled to end a two-day monetary-policy meeting. The central bank is expected by most experts to trim its monthly bond-buying program by $10 billion to $15 billion, staying on track to end the program at its October meeting. Some strategists say they expect the Fed to revise its statement, hinting at an increased readiness to raise short-term benchmark interest rates due to the fast U.S. economic recovery, reports The Wall Street Journal.

BusinessWeek reports that there is a 61 percent chance the Fed will raise the interest rate target to at least 0.5 percent by July 2015, compared to the chances of this happening at the start of the month, at 52 percent. The Fed last increased rates in 2006. Fed Chairwoman Janet Yellen will hold a news conference after the meeting.

The Bloomberg Dollar Spot Index, which tracks the greenback against a basket of 10 leading currencies, gained 0.2 percent to 1,047.20 after previously hitting 1,049.20, the most since July 2013. 

Global factors lift the greenback
Additional stimulus in Europe and weakening Japanese economic data, as well as other country-specific factors, have put pressure on major currencies and aided in lifting the dollar. Higher-yielding currencies fell as bets on interest-rate hikes ruined the appeal of assets in other countries. 

The greenback climbed 0.4 percent to 106.63 against the yen after reaching its highest level since Sept. 2008 at 106.80. It was little changed at $1.2943 per euro after reaching $1.2860 yesterday, the strongest since July 2013. The dollar also rose 0.7 percent to 91.37 cents per Australian dollar and was up 0.4 percent against the South African rand and 0.5 percent on India's rupee, the currencies of two developing countries with more expensive benchmark borrowing costs, reports BusinessWeek. 

Chris Weston, chief market strategist in Melbourne at IG Australia, a unit of IG Group said, "The U.S. dollar has had a really nice rally against everything else. The euro and the pound are so oversold that now people are looking to a positive U.S. dollar bias against the Aussie," according to BusinessWeek.

The Wall Street Journal reports that investors have recently said the Japanese yen would decline even further against the dollar. This was after data on Monday showing Japan's current account surplus in July fell below forecasts. The country's second-quarter growth was also revised lower. The disappointing data has sparked worries over Japan's stimulus efforts over the course of the year, including weakening the yen, as these haven't been successful at boosting the economy and may result in more action from the Bank of Japan.