Dollar near eight-month highs, supported by Fed policy expectations

NEW YORK, Nov 23 (Reuters) – The dollar hit an eight-month high on Monday, pushed by unusually hawkish comments from a regional U.S. Federal Reserve president over the weekend that helped further cement expectations of an interest rate hike in December.

With the so-called natural interest rate in the United States now near zero, and equilibrium rates in other countries around the world also lower than in the past, central banks have “significantly less room to maneuver” in the face of recessions, San Francisco Fed President John Williams said at a conference at University of California Berkeley’s Clausen Center.

This means that any move by the Fed to raise rates will see a much stronger USA dollar, which will, in turn, hurt U.S. exports and the competitiveness of their multinational corporations.

In a letter on Monday to consumer advocate Ralph Nader defending the Fed’s near-zero rate policy, Yellen said more upbeat data would mean that “it will be appropriate to begin to normalise interest rates”.

USA employment data next week is seen as the next major report to firm up whether the Fed will hike interest rates when it meets next month.

“This evening the Fed is holding an unscheduled meeting, the first since December 13, 2012”, writes Nour Al-Hammoury, chief market strategist at ADS Securities.

The likelihood of higher rates by year-end is 68 percent, up from 50 percent at the end of October, futures data show.

But while the timing of the first move seems settled, there remains some debate about how far or how fast the Fed will be raising rates.

“UBS’s view on the Federal Reserve is that a policy rate increase in December is a possibility and that would contribute to a 100 bps increase in rates over the next 12 months or so”, said Edward Teather, India &.

Market expectations were also fuelled by minutes from the Federal Reserve on Wednesday which showed its policymakers are satisfied the U.S. economy is strong enough to withstand a rate hike next month. Fed Vice Chair Stanley Fischer recently said that emerging market central bankers have been telling the Fed to “just do it”, which suggested to him that they were prepared for a rate hike.

“I am hopeful we can be more flexible and reactive to data”, he said. Of the remaining banks, potential candidates to join the discount rate hike, the Boston and Atlanta Fed’s are possible.

In the 2004-2006 cycle, the Fed, under Alan Greenspan and later Ben Bernanke, raised rates 17 times in quarter-point increments and at the time announced it expected to remove accommodation “at a pace that is likely to be measured”. Absent a very significant change in the outlook, failure to hike rates in December would renew the barrage of criticism regarding their communications strategy that prompted them to highlight the December meeting in their last statement.