Dollar soars in New York as December rate hike back in play

The dollar soared to its highest level in more than two months against the euro on Wednesday, propelled by renewed expectations the US Federal Reserve could raise interest rates in December. The US currency also rose to a more than seven-month peak against the Swiss franc and a two-week high versus sterling. The euro was down 2.4 percent so far this month, on track for its largest monthly loss since March.
At the conclusion of the Fed's two-day policy meeting, the US central bank held interest rates steady, as expected, but opened the door for a rate increase in December. The Fed said raising rates at its next meeting would depend on progress made on employment and inflation. The Fed also omitted any reference to global developments affecting US economic activity.
"This is very big for the dollar," said Alan Ruskin, global head of FX strategy at Deutsche Bank in New York. "The Fed is comfortable with policy divergence and will carve its own path independent of easy policy in the likes of China and the euro area." Following the Fed statement, 43 percent of rate futures traders expect the US central bank to announce a rate hike in December, up from 34 percent just before, according to CME Group FedWatch. More than 50 percent have priced a Fed tightening at the meeting in January.
In late trading, the euro was down 1.2 percent at $1.0915, after falling below $1.09 to its weakest level since early August. Against the Japanese yen, the dollar touched 121 and was last at 121.16 yen, up 0.6 percent. The dollar also advanced against the Swiss franc, to 0.9959 franc, the highest since mid-March. It last traded up 0.9 percent at 0.9949. Some market participants remained skeptical that the Fed could actually pull the trigger in December. Barclays in a research note said despite the Fed's hawkish tone, soft inflation and ongoing turbulence in emerging markets could delay the rate hike till March next year.
"Ultimately the reason they couldn't raise rates is not because of China or anything else, but because of the fear put into markets of the Fed raising rates," said Axel Merk, president and chief investment officer at Merk Investments in Palo Alto, California. "They've been chasing their own tail. ... Whenever they take a step in one direction, they end up having to step back. So, they'll try again (in December) and we'll see whether it works this time."