The dollar rose to a five-year high versus the yen (FOREX:USDJPY) after the Federal Reserve officials voted to reduce monthly asset purchases that are seen as debasing the U.S. currency amid signs that economic growth is strengthening.
The U.S. currency gained against most of its major peers after the central bank announced plans to cut its monthly bond purchases to $75 billion from $85 billion, taking its first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s. The Fed acted as a report showed housing starts last month reached a five-year high and the Labor Department reported Dec. 6. the unemployment rate declined to 7% in November, the lowest in five years.
“The dust still has to settle, but ultimately it’s positive for the dollar,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a phone interview. “The fact the Fed did taper shows it’s confident about the pace of recovery, and the financial market can withstand modest reduction at this time.”
The Bloomberg U.S. Dollar Index, which monitors the greenback against 10 major counterparts, gained 0.5% to 1.021.53 at 3:51 p.m. in New York. The greenback added 1.4% to 104.12 yen, the highest level since Oct. 6, 2008. The U.S. currency advanced 0.6% to $1.3685 versus Europe’s 17-nation euro.
“At the margin, people want to be bullish the dollar,” Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said in a telephone interview. “We finally got taper, so the market can stop wondering when it’s coming and focus on other things.”
The central bank left unchanged its statement that it will probably hold its target interest rate at almost zero “at least as long as” unemployment exceeds 6.5%, so long as the outlook for inflation is no higher than 2.5%. Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25% since 2008.
“While we have passed or made significant progress on the labor market and growth hurdles, there is still this concern about inflation,” Bernanke said at a press conference after the Federal Open Market Committee’s meeting. “If inflation does not show signs of returning to target we will take appropriate action.”