The US dollar outperformed all of its 16 major peers last year after the US Federal Reserve began its first interest-rate-raising cycle in almost a decade.
A gauge of the US currency posted a third year of gains after central bank policymakers deemed the economy strong enough to merit boosting rates from virtually zero. The yen had a record fourth annual decline, while the euro slumped a second year, as stimulus in Japan and the eurozone widened the gap between monetary policy in those regions and the US
Divergence was the name of the game for currency traders last year as US policymakers inched toward tighter monetary conditions, while central banks elsewhere eased. That sent the dollar flying higher during the first three months of the year, before disappointing economic data and dovish talk from the Fed stalled the rally. Incremental gains followed as the Fed finally delivered higher rates.
“The story for most of the year was weakness in foreign currencies against the dollar, rather than dollar strength, in the sense that Fed tightening expectations kept being pushed back,” New York-based BNP Paribas SA foreign-exchange strategist Vassili Serebriakov said.
The dollar advanced versus all 16 of its major peers last year, with gains ranging from 49 percent against Brazil’s real to less than 1 percent versus the yen and Swiss franc. The Bloomberg Dollar Spot Index, which tracks the US currency against 10 major peers, has advanced 9 percent last year, and traded at 1,232.59 as of 5pm in New York.
The yen weakened 0.4 percent last year to ￥120.22 per dollar, set for its longest streak of annual losses in data compiled by Bloomberg from 1971, while the 19-nation euro tumbled 10.2 percent versus the greenback last year. Japanese financial markets were closed on Thursday.
More Fed rate increases are forecast this year, with futures showing about two and the central bank projecting four. That should give the dollar another leg up, with the currency forecast to appreciate versus seven of 10 major peers.
The euro is expected to tumble to US$0.95 by the end of this year, he said — a level last reached in 2002.
A combination of Bank of Japan stimulus and higher US rates will send the Japanese currency down another 4 percent this year, according to the median estimate in a Bloomberg survey.
A measure of 20 developing-nation exchange rates depreciated 15 percent last year, the steepest slide since the 1997 Asian financial crisis, when it slumped 23 percent. All but six of the 24 emerging-market currencies tracked by Bloomberg are expected to weaken again in the next 12 months.
In Asia, currencies weakened last year mainly due to capital outflows in anticipation of higher US interest rates and the impact from China’s economic slowdown. Malaysia’s ringgit led the losses with a 19 percent decline as the slide in Brent crude also cut government revenue for the region’s only major net oil exporter. It was the worst annual performance since 1997. Indonesia’s rupiah dropped 10 percent, the Thai baht depreciated almost 9 percent and South Korea’s won lost 6.3 percent.
The rupiah, won and the New Taiwan dollar are forecast to lead declines this year.
The NT dollar edged down by NT0.016 to NT$33.066 on Thursday.
The British pound lost another 0.5 percent at US$1.4737. That nevertheless was still nearly US$0.02 higher than the year’s low, struck in April.
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