Dollar Rallies Precede Fed Tightening Cycles: Chart of the Day


History’s message to currency investors is buy the dollar six to nine months before the Federal Reserve starts raising interest rates.

The CHART OF THE DAY shows the U.S. Dollar Index climbed about 7 percent during periods six to nine months before the start of the previous three central-bank tightenings started in February 1994, June 1999, and June 2004. The greenback appreciation tends to fizzle and the performances became mixed after the first actual increase in the Fed’s target for the federal funds rate.

The Fed has kept the benchmark rate at a record-low zero to 0.25 percent since December 2008, while futures traders saw about a 56 percent chance the central bank will start raising rates by July 2015, according to data compiled by Bloomberg. The July Federal Open Market Committee meeting showed policy makers discussed the possibility that jobs gains may lead them to increase rates sooner than anticipated.

“Leading up to the first hike, that’s when the dollar gains the most consistently,” Jens Nordvig, a managing director of currency research at Nomura Holdings Inc. in New York, said yesterday. “That’s more consistent than anything happened after the rate hikes.”

The U.S. Dollar Index, which Intercontinental Exchange Inc. uses to track the currency against a basket of six major trading partners, has gained 3.5 percent this quarter on signs the world’s biggest economy is improving. The jobless rate was 6.2 percent last month after falling in June to a five-year low of 6.1 percent, a level policy makers had forecast it wouldn’t reach until the end of the year.

Global interest-rate differentials determine whether the dollar continues the rally after the first rate increase, Nordvig said. The currency did extend its pre-tightening gains in the 1999 cycle when the Fed increased interest rates to as high as 6.5 percent in May 2000, compared with 0 percent in Japan and 3.75 percent in euro zone.


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