Dollar firms against euro, yen on outlook for Fed rate hike

US dollar notes lie in stacks at the Bureau of Engraving and Printing in Washington, DC.
(Photo: AFP/Mark Wilson)

NEW YORK: The dollar gained ground against the euro and yen on Tuesday (Jan 20) as the market expects the Federal Reserve will raise interest rates this year as the US economy continues to strengthen.

The Fed's policy path was underscored by the International Monetary Fund's latest economic growth estimates that showed weaker momentum in nearly all major economies, except the United States.

The IMF reduced its global economic growth forecast for this year to 3.5 per cent, and to 3.7 per cent in 2016. By contrast, the IMF raised the US growth estimate for this year to 3.6 per cent from 3.1 per cent.

The Fed, which holds its first monetary policy meeting of the year next week, is expected to lift its key rate in the first half of the year, from near zero where it has been pegged since December 2008 to help support the US recovery from the deep 2008-2009 recession.

The euro remained stuck in long-running weakness against the greenback ahead of the European Central Bank monetary policy meeting on Thursday. The ECB is expected to further open the liquidity floodgates and announce a program of sovereign bond purchases, known as quantitative easing, to prop up the sagging 19-nation eurozone economy.

"The greenback was on sound overall footing at one-week highs against the yen and near its best levels in 11 years versus the euro. Markets will be in a central bank frame of mind over the coming week, a narrative that in recent months has supplied the US currency with outsized appreciation," said Joe Manimbo at Western Union Business Solutions.

"Confirmation from the Fed that a mid-2015 rate hike is on the table would keep a strong pillar under the dollar," he said.