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US Dollar Index Hits 85.00

H.S. Borji
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US Dollar Index Hits 85.00

The US dollar rose to fresh highs against a basket of currencies on Wednesday, as a surge in new home sales unleashed a fresh wave of bullishness for the world’s most actively traded currency.

The dollar index, which measures the performance of the greenback against a basket of currencies including the euro, Japanese yen, British pound, Canadian dollar, Swiss franc and Swedish krona, surged 0.44 percent to 85.03.

Stronger US data and growing speculation the Federal Reserve is considering an early rate hike have boosted demand for the greenback in recent months. These broad market forces, combined with a deteriorating economic outlook in Europe and Japan that have resulted in broad sell-offs of competitor currencies, have lifted the US dollar index 6.5 percent since July 1.

The dollar index rose for the tenth consecutive week on September 19, its longest rally since at March 1967, according to Bloomberg News.

The dollar was supported on Wednesday by an unexpected surge in new home sales, which have struggled to gain traction this year amid rising house costs and tighter lending terms.

The sale of new US homes surged 18 percent in August to a seasonally adjusted annual rate of 504,000, according to the Commerce Department. That marked the biggest single-month gain since 1992, which brought new home sales to their highest level in more than six years.

July new home sales increased 1.9 percent to 427,000 after the initial estimate reported a decline.

The surprise housing report will probably fuel speculation the economy was progressing fast enough to warrant a shift in monetary policy at the start of 2015. The Federal Reserve reaffirmed its commitment to ultra-low interest rates at the September policy meetings, maintaining that monetary policy will remain accommodative for a “considerable time” after the end of quantitative easing.

However, the Fed decided to pare asset purchases for the seventh successive time last week, bringing the total monthly asset purchase facility to $15 billion. Central bankers are widely expected to end the record bond buying program in October.

Despite the Fed’s renewed commitment to low interest rates, the markets are increasing their bets a rate hike will materialize before the middle of 2015, the oft-stated timeline for the beginning of policy normalization. Back in March Fed Chair Janet Yellen said the central bank could begin lifting interest rates “six months” after the end of QE. Although America’s top central banker retracted her comments, this timeline is being used as a guidepost for future Fed activity.

The “six months” timeline puts the Fed on course to begin lifting interest rates in March of next year.

Stronger GDP growth in the second quarter will probably add to the view the US economy was progressing fast enough to warrant rate-hike consideration sooner rather than later. Second quarter GDP is expected to be revised upward for the third consecutive time to reflect annual growth of 4.5 percent in the April to June period.

The central bank downgraded its outlook on economic growth this year. Central bankers in September forecast the economy to grow between 2 percent and 2.2 percent this year, down from the June estimate of 2.1 percent to 2.3 percent.

Central bankers forecast growth of 2.6 percent to 3 percent next year, down from the June estimate of 3 percent to 3.2 percent.

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