By Josie Cox and Anjani Trivedi
The U.S. dollar has been climbing for nine weeks, marking its
longest rally in 17 years, spurred by expectations that the Federal
Reserve could raise interest rates next year, in a divergence from
other major central banks that are still in easing mode.
The ICE U.S. Dollar Index, which measures the dollar's strength
against six major currencies, hit 84.519 on Friday. The previous
nine-week period of gains occurred between December 1996 and
February 1997.
"We see potential for dollar strength to broaden out,
particularly if the Fed surprises markets with less dovish forward
guidance next week," Morgan Stanley strategists write in a
note.
"The dollar is not just the best performing developed world
currency on a five-day view, but it can currently claim to be the
best performer on both a one-month and three-month view also," said
Jane Foley, currency strategist at Rabobank in London.
Ms. Foley said the dollar is being spurred by positive U.S.
economic data, but also by the European Central Bank, which last
week decided to push its deposit rate further into negative
territory.
"On the relative basis, the ECB action has made the carry
offered by the U.S. dollar more attractive," she said.
Growth in the U.S. has outpaced much of the rest of the
developed world, fueling expectations for the Fed to raise interest
rates, while the ECB and Bank of Japan remain firmly in easing
mode.
Bank of America Merrill Lynch chief economist Ethan Harris, in a
note Friday, said he now expects a Fed rise in June next year,
earlier than his previous forecast for September 2015, citing
forecast-beating gross domestic product data as well as stronger
than anticipated inflation.
GDP, considered the broadest measure of goods and services
produced across the economy, grew at a seasonally adjusted annual
rate of 4.2% in the second quarter.
The bank said that buying the dollar "is the best way to
position" for what will be the first rate rise in the U.S. since
2006.
Higher interest rates would boost the U.S. dollar as investors
seek the increased return promised by dollar-denominated
assets.
On Thursday, the U.S. dollar hit a seven-month high against the
New Zealand dollar, a five-month high against the Australian
dollar, as well as a six-month high against the yen, after Bank of
Japan Governor Haruhiko Kuroda said the bank was prepared to loosen
monetary policy or take other steps, if necessary, to meet the
county's inflation target.
The dollar has also gained traction against the British pound in
recent weeks, despite the Bank of England also moving toward
lifting interest rates, helped by sterling coming under pressure
amid uncertainty ahead of the Scottish referendum scheduled to take
place next week.
Write to Josie Cox at josie.cox@wsj.com and Anjani Trivedi at
anjani.trivedi@wsj.com