LONDON: The prospect of Federal Reserve stimulus being wound down will underpin the dollar for the next few months as the lure of higher US yields drives traders to eschew other currencies in favour of the greenback.
The Fed expects further gains in labour markets, supported by moderate growth that picks up over the coming quarters as near-term fiscal restraint diminishes, which will allow it to take its foot off the gas of monetary accommodation.
If economic data was broadly consistent with this forecast, the Fed could slow the pace of its $85 billion monthly asset purchases later this year, Fed Chairman Ben Bernanke said on Wednesday.
Welcome to the taper, the siphoning off of some of the drink in the punchbowl, even if the punchbowl is left on the table.
US Treasuries prices slid on Wednesday and again on Thursday, pushing 10-year yields to their highest since August 2011.
The rise in US yields underpins the attraction of the greenback, with the benchmark 10-year US Treasury yielding 2.40 percent on Friday.
That is above corresponding rates for British and German paper, and markedly above the returns offered on 10-year Japanese and Swiss government debt.
At the same time, while traders feel the Fed has essentially announced a timetable to temper the scale of asset purchases, other major central banks have no such plans.
European Central Bank chief Mario Draghi made plain on Tuesday that making banks pay to park money overnight with the ECB, by taking the deposit rate into negative territory, was still a possibility.
Outgoing Bank of England Governor Mervyn King, who steps down at the end of June, said on Wednesday there "is a powerful case for more stimulus in the short run" to boost the British economy.
Bank of Japan Governor Haruhiko Kuroda said on Tuesday there was room to shift monetary policy if economic conditions changed sharply, leaving the door open for further monetary stimulus if needed.
The BOJ pledged in early April $1.4 trillion in stimulus over two years - a move that pushed the yen lower against the dollar, ultimately pushing the greenback to a near-three-year high against a basket of currencies.
Swiss National Bank head Thomas Jordan said Thursday the question of a Swiss exit its extraordinary policy measures was so far away that the SNB had not yet thought about how to communicate it.
In all cases the contrast between these standpoints and the outlook from the Federal Reserve is striking. Buy dollars, wear diamonds, as the old saw goes among forex traders.
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