Dollar recovery could be felt on Main Street

December 23, 2014 05:03 AM

A gauge of the dollar climbed to a five-year high after the economy expanded at the fastest pace in more than a decade, supporting the case for the Federal Reserve to raise interest rates.

The greenback (NYBOT:DXH15) advanced for a fifth day against the yen (CME:J6H15) as consumer spending rose more than previously estimated, with higher employment and lower gasoline (NYMEX:RBG15) prices boosting household confidence and buying power. Traders see an 87% chance the Fed will raise borrowing costs by the end of 2015, fed-funds futures data compiled by Bloomberg show. Australia’s dollar reached a four-year low. The ruble (CME:R6F15) strengthened for a third day.

“This is a net positive for the dollar,” said Quincy Krosby, a market strategist at Prudential Financial based in Newark, New Jersey, which oversees $1 trillion in assets. “These are the kind of numbers that are in line with a recovery in the real economy, the kind of recovery that’ll be felt on Main Street.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose 0.3% to 1,130.69 at 8:56 a.m. New York time after touching 1,130.72, which would be the highest on a closing basis since March 2009.

The dollar climbed 0.4% to 120.47 yen and headed for a fifth day of gains, its longest streak since Nov. 20. The U.S. currency added 0.3% to $1.2192 per euro after appreciating to $1.2217 yesterday, the strongest since August 2012. The euro (CME:E6H15) was little changed at 146.90 yen.

Prudential is “constructive on the dollar against the euro and the yen in the long term,” Krosby said.

Economic Growth

Gross domestic product grew at a 5% annual rate from July through September, the biggest advance since the third quarter of 2003, and up from a previously estimated 3.9%, revised figures from the Commerce Department showed today in Washington. The median forecast of 75 economists surveyed by Bloomberg projected a 4.3% increase.

A separate report showed orders for U.S. durable goods unexpectedly declined in November. Bookings for goods meant to last at least three years decreased 0.7%, the third decline in four months, a Commerce Department report showed today in Washington. The median forecast of 77 economists surveyed by Bloomberg called for a 3% gain after a 0.3% increase in October.

“Very strong Q3 GDP revision—but the November durables reading was certainly disappointing,” Matt Derr, a foreign-exchange strategist at Credit Suisse Group AG, said by e-mail. “With the GDP revision backward-looking, I would expect the market to focus more on the soft durables. Nonetheless, this shouldn’t change the broader USD direction, but add to near-term chop.”