The dollar extended its recent rally on Thursday, climbing to a three-month high on a trade-weighted basis after the Federal Reserve delivered a modest upgrade to its assessment for the US economy.
In the statement following the Fed’s policy meeting on Wednesday, the central bank maintained its dovish stance on interest rates, pledging to keep rates at ultra-low levels for an extended period.
However, traders focused on the central bank’s more hawkish assessment of the economy as it acknowledged that “the deterioration in the labour market is abating”.
Analysts said this would help reinforce expectations that a continued improvement in that area could change Fed thinking quite rapidly and herald a faster exit from the central bank’s zero interest rate policy.
Ashraf Laidi at CMC Markets said the overall tone of the Fed’s statement was more than sufficient for the dollar to extend its upward trajectory, especially amid the rapid concentration of credit and banking problems in the eurozone that were casting a shadow on non-dollar currencies.
He said, considering the recent strength of US economic data, including stronger-than-expected employment, retail sales and inflation figures, dollar bulls would content themselves with the slightest hawkish commentary from the Fed.
“Only a specifically new dovish element in the Fed statement would have reversed the course of the dollar rebound,” said Mr Laidi.
The dollar index, which tracks its progress against a basket of six main currencies, rose 0.9 per cent to 77.666, its strongest level since September 8.
Meanwhile, the dollar climbed 1.3 per cent to a three-month high of $1.4348 against the euro as a downgrade of Greece’s credit rating continued to weigh on the single currency.
Standard & Poor’s, the ratings agency, cut Greece’s long-term sovereign rating to BBB+ late on Wednesday, less than a week after the country was put on negative credit watch.
Although the Greek government has launched a charm offensive stressing that it intends to cut its 2010 budget deficit by 4 per cent, investors remained sceptical on its ability to implement reform.
Jane Foley at Forex.com said that while there were no realistic expectations that the deficit issues facing Greece – and other eurozone countries such as Ireland, Spain and Portugal – would lead to a disintegration of the euro, the problems did highlight that an inflexible and strong exchange rate could be a burden in times of stress.
“Talk that stronger countries will bail out weaker eurozone partners rather than increase the strains on the system also highlights the risks that failure to follow through with structural reform will again be papered over,” she said.
“Given there is a high risk of more bad budget news from Portugal, Spain, Iceland and the Baltics, this issue could undermine the euro for months to come.”
The dollar also rose to a two-month high against the pound after a surprise drop in UK retail sales in November undermined sterling, providing a big disappointment regarding the economy’s recovery prospects.
The dollar also rose 0.3 per cent to Y89.99 against the yen and climbed 1.1 per cent to SFr1.0496 against the Swiss franc.
Commodity-linked currencies also came under pressure, with the Australian dollar falling 1.4 per cent to $0.8877 against the US dollar, the New Zealand dollar dropping 1.3 per cent to $0.7107 and the Norwegian krone falling 1.9 per cent to NKr5.8631.
