Publications
Partners
Tokyo - The Federal Reserve is certain to raise interest rates in December, lifting the dollar towards parity with the euro, according to investment management company Invesco.
Dollar strength will come largely against emerging Asian currencies rather than its developed-market peers, with the yen particularly resilient as the Fed keeps the pace of tightening slow, with two additional rate increases in 2016, the Atlanta- based manager of about $790bn in assets said.
The greenback touched a seven-month high against Europe’s single currency on Wednesday when minutes from the Fed’s October meeting revealed officials inserted language into their policy statement to stress that December liftoff “may well become appropriate,” even as they largely agreed that the pace would be gradual.
Futures indicate the odds of higher rates by year-end are 66%.
“We think that the market is largely priced for the Fed, and we don’t think the Fed is going to be very aggressive, so therefore we don’t think the yen is going to weaken a lot,” Rob Waldner, head of multi-sector fixed income at Invesco, said in an interview in Tokyo on Wednesday.
“We could see the euro go to parity. That’s not very far though. That’s pretty close. But we think most of the strength now should be against non-Japan Asia.”
Next meeting
The dollar declined 0.4% to $1.0705 per euro as of 07:55 from Wednesday, when it touched $1.0617, the strongest level since April 15. It slid 0.3% to ¥123.27.
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, retreated 0.4% to 1 230.22, after closing at 1 235.71 in New York, the highest level since its December 31, 2004 inception.
Waldner identified the Malaysian ringgit, South Korean won and Thai baht among the currencies most vulnerable to further dollar strength, while the yen has already weakened enough following a 34% slide against the greenback over the past three years.
“The yen is at an appropriate level,” he said. “Any further weakness would be detrimental to the economy.”
December Move
A majority of Fed officials have signaled they expect to raise interest rates this year for the first time since 2006. That message was underscored when policy makers inserted a reference to the “next meeting” on December 15 to December 16 in their October statement, in connection with their assessment on when to act.
Participants in the meeting “generally agreed,” the minutes showed, “that it would probably be appropriate to remove policy accommodation gradually,” making it likely that the path of rate increases would be shallow after liftoff.
The economic data has also supported the case for higher US rates, with reports this month showing employers added the most jobs for 2015 in October and inflation ticked higher.
By contrast, European Central Bank President Mario Draghi has signaled readiness to expand quantitative easing in December as the economy unexpectedly slowed last quarter.
“We think that the US is at full employment, we think that US underlying inflation is rising, so the Fed has essentially met their targets,” said Waldner. “In Europe, there is still excess capacity and inflation is still low, so the ECB is going to continue to be easy.”
The probability the Fed will act next month has increased from 50% at the end of October, futures contracts show. The calculation is based on the assumption that the effective fed funds rate will average 0.375% after the first increase.
The dollar is already stronger than the median year-end estimate of $1.08 per euro among analysts surveyed by Bloomberg. The currency is forecast to appreciate to $1.06 at the end of March.
“The central bank in Europe has given a very clear sign that they want to have a weaker euro,” Hans Redeker, Morgan Stanley’s London-based head of global currency strategy, said in an interview in Singapore. “I think that we are going to test parity.”
