The dollar extended gains against its major peers after posting its best year since at least 2005 amid speculation the Federal Reserve will raise interest rates this year.

The euro slumped to the lowest level in more than two years amid expectations that the European Central Bank, which next meets on Jan. 22, will start buying sovereign bonds. The yen traded lower against the dollar after tumbling for a third straight year amid speculation the Bank of Japan will continue unprecedented stimulus measures. The currencies of Australia and New Zealand had their biggest declines in more than two weeks after a manufacturing data in China pointed to a slowdown.

“While the Fed is not going to rush into any action, rates will go up,” said Thomas Averill, a managing director in Sydney at Rochford Capital, a currency and rates risk-management company. “The market is very long the dollar against the yen and the euro, and across the board,” he said, referring to a bet the greenback will appreciate.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.4 percent to 1,135.53 at 12:44 p.m. Singapore time, heading for the highest close since March 2009. The gauge rose 11 percent last year, the most in data going back to 2005.

The euro declined 0.4 percent to $1.2054, after reaching $1.2048, the lowest level since July 2012. Against Japan’s currency, the euro rose 0.2 percent at 145.21. The yen slid 0.6 percent to 120.46 against the dollar, extending last year’s 12 percent decline.

China Manufacturing

Australia’s dollar dropped 0.7 percent to 81.28 U.S. cents. New Zealand’s currency, also known as the kiwi, fell 0.7 percent to 77.48 U.S. cents. The currencies declined the most since Dec. 17.

The Chinese government’s Purchasing Managers’ Index fell to 50.1 in December from 50.3 in November, according to data released yesterday by the statistics bureau and the China Federation of Logistics and Purchasing in Beijing. The index slipped to the lowest level in 18 months. China is Australia and New Zealand’s biggest trading partner.

The euro extended declines after depreciating 12 percent last year, the most since 2005. Strategists forecast a drop to $1.18 by the end of this year as European Central Bank President Mario Draghi seeks to spur the region’s struggling economy and ward off deflation.

Low Inflation

With inflation languishing below the ECB’s goal of just under 2 percent and the market’s outlook for consumer prices crumbling as crude oil declines, more than 90 percent of respondents in a monthly Bloomberg survey in December predicted that the ECB would expand the supply of euros by beginning to purchase sovereign bonds in 2015. That’s up from 57 percent the previous month.

Lithuania became the 19th member of the single European currency bloc yesterday.

The greenback rose against all of its 16 major peers. Markit Economics is expected to say today that its U.S. manufacturing index rose, based on responses from economists.

South Korea’s won fell the most in a more than a week amid concern a decline in the yen will reduce the competitiveness of the nation’s exporters. The won dropped 0.4 percent, the most since Dec. 23, to 1,103.35 a dollar, prices from local banks compiled by Bloomberg show.

South Korea’s manufacturing purchasing managers’ index (CPMINDX) for December came in at 49.9, compared with 49 in November, according to data released today by HSBC Holdings Plc and Markit Economics. Fifty is the dividing line between expansion and contraction.

“The main impact on the Korean won has been the yen, which is weaker today,” said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd. “There’s a slight pickup in the PMI, but it’s still below 50.”

Seoul’s financial markets were shut Dec. 31 and Jan. 1. Markets remain closed today in China, Japan, New Zealand, Philippines, Taiwan and Thailand.

 

Source: Bloomberg – Dollar Extends Rally on Fed View; Euro Slumps to Two-Year Low

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