Dollar rallies as markets bring forward Fed hike call

SYDNEY Wed Mar 19, 2014 11:32pm GMT

1 of 4. A cashier counts out money at Macy's Herald Square on Thanksgiving Day in New York November 28, 2013.

Credit: Reuters/Eric Thayer

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SYDNEY (Reuters) - The dollar traded at two-week highs against a basket of major currencies early on Thursday, having posted solid gains after comments from Fed Chair Janet Yellen prompted markets to bring forward interest rate hike expectations.

Yellen said the Federal Reserve will probably end its massive bond-buying program this coming fall, and could start to raise interest rates around six months later, sooner than markets had anticipated.

The reaction was swift with the benchmark Treasury yield jumping 9 basis points to 2.77 percent. That in turn helped the dollar index climb 0.7 percent, the biggest one-day move in over a month, to highs last seen on March 6.

The greenback fetched 102.40 yen, having surged 0.9 percent, while the euro fell around 0.7 percent to $1.3822 (8358 pence). The Canadian dollar slid to a 4-1/2 year low of C$1.1273 per USD, while the Australian dollar dipped back below 91 U.S. cents.

Markets all but ignored Yellen's emphasis that rates will stay low for a while and could end up staying lower than normal "for some time" even after the economy regains its health given lasting scars from the financial crisis.

As a result, some analysts warned the big dollar rally could fade just as quickly as it came.

"There may be some effort by Fed officials or sources to downplay the six-month time-frame comment in the days ahead," BNP Paribas analysts wrote in a note to clients.

"The timing of Fed hikes and the ability of the U.S. dollar to maintain momentum clearly remains data dependent and our rates strategy team sees some scope for retracement in the big selloff in yields that came on the comments."

Yellen's remarks followed the Fed's widely expected move to reduce its monthly purchases of U.S. Treasuries and mortgage-backed securities to $55 billion (33.25 billion pounds) from $65 billion.

Sterling plumbed one-month lows against the broadly firmer greenback, a disappointing performance given an upbeat annual budget statement that saw the government upgrade official forecasts for economic growth.

It last traded at $1.6533, having fallen as far as $1.6508. The pound has been pretty much range-bound after reaching four-year highs of $1.6823 last month.

Many economists say a lot of good news on the British economy has been well and truly priced into the currency, leaving little fuel for further gains.

This was also likely the case for the New Zealand currency, which barely reacted to local data showing the economy grew at an enviable 3.1 percent annual pace.

"It is a good number but one that was pretty much anticipated. The message that the economy is growing above potential is well established by now," said Ben Jarman, economist at JPMorgan in Sydney.

The kiwi slipped to $0.8531, pulling further away from a near one-year high of $0.8641 set earlier in the week.

(Editing by Richard Pullin)