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Dollar Bulls Celebrate as Fed Shift Fuels Rally to Decade High

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(Bloomberg) -- With the decade-long wait for higher U.S interest rates finally ended, investors are piling into the dollar.

A gauge of the greenback reached the highest in data going back to early 2005 on a closing basis after the Federal Reserve unanimously voted to raise its benchmark for the first time since 2006. The currency surged to an 11-year high against its Canadian counterpart and rallied more than 1% against the Australian dollar and South Africa's rand.

Policy makers delivered something for everyone, maintaining projections, known as dots, for four rate increases next year, while emphasizing the gradual pace. In doing so, Fed Chairwoman Janet Yellen preserved expectations for further U.S. divergence from other major central banks that has already fueled dollar gains this year.

"There's more room for the dollar to go" as the Fed raises rates, Eric Stein, a money manager at Eaton Vance in Boston, said by phone. "We've been in the dollar-bull camp for a while and we still remain there."

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, climbed 0.8% as of 11:04 a.m. in New York, the highest on a closing basis since January 2005. The six straight gains marks the longest streak since October. The greenback strengthened 0.8% to $1.0829 per euro and 0.4% to 122.75 yen.
Citigroup, the world's largest currency trader, expects higher rates to foster a U.S. dollar rally over 12 months, while France's largest bank, BNP Paribas, sees the currency strengthening more than 4% to $1.04 per euro by the end of March, analysts at the lenders wrote.

Crude oil prices fell 1.7% to $34.92 a barrel in New York, while the Bloomberg Commodity Index reached the lowest level since 1999.

"We've been negative on commodity currencies for some time -- the outlook for divergent monetary policies is incredibly clear now," said Atul Lele, chief investment officer of Nassau, Bahamas-based Deltec International Group. "Now that the Fed's clearly on the tightening path, it's emboldens our views" that the dollar will strengthen versus the Aussie and loonie, he said.


Currency traders have been on alert for a repeat of the dollar weakness that followed the start of tightening cycles in 2004, 1999 and 1994.

The greenback had weakened earlier this month as some traders anticipated a selloff in the currency once the central bank announced its decision to set the new target range for the fed funds rate at 0.25% to 0.5%, up from zero to 0.25%. Hedge funds and other large speculators cut their bullish greenback positions in the last two readings of data from the Commodity Futures Trading Commission.

"The hawks had something in there which pleased them," said Thomas Flury, head of currency strategy at UBS' wealth management arm in Zurich. "We're looking for euro-dollar to come down toward $1.05 pretty soon," he said, adding that the Fed met expectations and the unit isn't reviewing any of its forecasts.

The Federal Open Market Committee's decision met expectations, John Normand, the London-based head of foreign exchange, commodities and international rates research at JPMorgan Chase, wrote in a note. "We keep the 2016 currency forecasts U.S. dollar bullish through Q2," and position for gains in the currency versus the pound, as well as the New Zealand, Singapore and Taiwan dollars, he wrote.

Goldman Sachs, which modified its forecast for dollar strength versus the euro after the European Central Bank's last meeting, predicted the greenback would climb around 14% though the end of 2017 against major counterparts as short-end yield premiums enhance the greenback's allure.

"The dollar is a buy," Goldman analysts Robin Brooks, Michael Cahill and George Cole wrote in a report. Comparisons that expect dollar weakness, based on declines that followed past Fed tightening, "ignore what a unique policy experiment has just ended."

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