Bloomberg: Dollar Rises After Fed Raises Rates, Signals More Increases Are Coming

Dec. 13 (Bloomberg) — The dollar rose after the Federal
Reserve raised its benchmark interest rate for the 13th straight
time to 4.25 percent and said it will keep increasing borrowing
costs at a “measured” pace.

The U.S. currency rebounded after initially paring gains
versus the euro and the

yen as futures contracts showed traders
still expect at least two more rate increases even as the
central bank stopped saying there is “accommodation” in its
monetary policy.

“It doesn’t mean the Fed has to stop,” said Michael
Klawitter, a currency strategist at WestLB AG in Dusseldorf,
Germany. “The dollar can still strengthen.”

Against the euro, the dollar rose to $1.1935 at 4:27 p.m.
in New York, from $1.1953 yesterday, according to electronic
currency-dealing system EBS. The dollar also traded at 119.97
yen, from 119.78. The dollar is up about 13.6 percent against
the euro and 17 percent against the yen this year as the U.S.
rate advantage over the euro region and Japan widened.

“The committee judges that some further measured policy
firming is likely to be needed to keep the risks to the
attainment of both sustainable economic growth and price
stability roughly in balance,” the rate-setting Federal Open
Market Committee said in its statement after meeting today in
Washington.

The Fed has raised rates by a quarter-point at every
meeting since June 2004, when the target was at a 46-year low of
1 percent. The European Central Bank this month raised its
benchmark rate to 2.25 percent, and the Bank of Japan will this
week keep borrowing costs near zero percent, according to
economists surveyed by Bloomberg.

`Support the Dollar’

All 22 primary dealers of U.S. government securities that
trade with the Fed’s New York branch expected a quarter-point
rate increase today. Twelve of the dealers in a Bloomberg News
survey last week predicted policy makers would drop the word
“accommodation” from the statement, language it has used since
January 2002.

“Interest-rate differentials still support the dollar,”
said Samarjit Shankar, director of global strategy for the
foreign exchange group in Boston at Mellon Financial Corp. He
expects the dollar to trade at $1.20 per euro and 117 yen at the
end of February.

The yield advantage of 10-year U.S. Treasury notes over
similar-maturity German government bonds reached 1.18 percentage
point in November, the most since January 2000 and up from about
0.6 percentage point at the start of the year. The gap is 1.13
percentage points today.

The benchmark U.S. 10-year note yield was at 4.53 percent
after the Fed announcement from 4.57 percent the last time the
FOMC met on Nov. 1.

End Is `Visible’

The dollar’s advance may be limited on expectation the Fed
may soon signal it is through raising interest rates, said
Marios Maratheftis, a currency strategist at Standard Chartered
Plc in London.

“There will be a few more hikes, but the end of the rate
cycle is starting to become visible,” said Maratheftis. “The
dollar will be under pressure, but any sell-off won’t be too
sharp.”

Traders were already anticipating the Fed would signal it
was close to finished raising rates, given the dollar’s recent
drop, said Brian Garvey, senior currency strategist at State
Street Global Markets in Boston. The U.S. currency is down 1.7
percent versus the euro in the last 30 days.

“The Fed has done a good job of signaling this,” said
Garvey. “`Measured’ is still in the text, so from that
standpoint they still have more to go. Interest-rate
differentials are still attractive versus the yen and euro.”

`Before Long’

Fed policy makers discussed the need “before long” to
change their outlook for the benchmark rate, with some worried
about the risk of raising it too much, according to the minutes
of their Nov. 1 meeting released on Nov. 22.

The yield on federal fund futures for April delivery fell a
half basis point, or 0.005 percentage point, to 4.65 percent at
the Chicago Board of Trade. The level signals traders see a 60
percent chance of an increase to 4.75 percent rate by April,
down from 62 percent yesterday.

The yen, poised for its worst year against the dollar since
1979, has risen more than 1 percent since reaching a 32-month
low against the dollar on Dec. 5 and may rise on speculation the
BOJ will report rising optimism among business leaders in a
survey tomorrow.

The bank’s so-called Tankan report will show an index of
confidence among large manufacturers rose to 23 points in
December from 19 points in September, according to the median
forecast of 37 economists surveyed by Bloomberg News. A positive
number means optimists outnumber pessimists.

“It’s likely the BOJ will be raising interest rates
through 2006, and that will be supportive for the yen,” said
John Kyriakopoulos, a currency strategist in Sydney at National
Australia Bank Ltd. “The BOJ in the second quarter of next year
will start to raise interest rates.”

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