(Bloomberg) -- The dollar gained versus all its major counterparts after Federal Reserve policy makers indicated theyll probably raise interest rates by the middle of next year with the U.S. economy showing signs of strengthening.
The greenback rose the most since January versus the euro and yen as the Federal Open Market Committee discarded a jobless-rate threshold for considering when to raise borrowing costs and said it will look at a wide range of data. Policy makers also reduced monthly bond-buying by $10 billion, the third consecutive cut of that size. The Canadian dollar slid to the weakest since 2009 on bets the Fed will raise rates before the Bank of Canada does.
Compared to markets expectations going into meeting, the statement is on the hawkish side, Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford, Connecticut, said in a phone interview. Now were looking at a qualitative assessment of the economy and were gradually moving out of a low-rate environment.
The dollar gained for the first time in four days against the euro, climbing 0.7% to $1.3833 at 5:32 p.m. New York time. It rallied as much as 0.9%, the biggest intraday jump since Jan. 2, to $1.3810, the strongest level since March 6. The U.S. currency rose as much as 1.2%, the most since Jan. 14, to 102.68 yen before trading at 102.32, up 0.9%. The euro rose 0.1% to 141.54 yen.
The Bloomberg Dollar Spot Index, which monitors the greenback against 10 major counterparts, rose 0.8% to 1,020.09 and reached 1,021.42, the highest since Feb. 27. It touched 1,011.35 on March 17, the lowest since Nov. 1.
The Fed cut monthly bond purchases to $55 billion and said in a statement it will reduce buying in further measured steps. Economists in a Bloomberg survey forecast policy makers will announce an end to the program in October.
Fed Chair Janet Yellen said at a press conference after the two-day meeting she sees a considerable time between the end of the stimulus and the first interest-rate increase, meaning around six months or that type of thing.
Central-bank officials estimated the benchmark U.S. interest-rate target will be 1% at the end of 2015 and 2.25% a year later. That was higher than in December, when they estimated 0.75% and 1.75%. The rate has been held at zero to 0.25% since December 2008 to support the economy.
The Canadian dollar slumped to the weakest in 4 1/2 years on speculation the Fed will tighten monetary policy faster than Bank of Canada. Central-bank Governor Stephen Poloz said yesterday a rate cut might be possible if the economy worsens.
Poloz said yesterday that he could not entirely rule out a rate cut, and I guess that gives you in the forward guidance a little-more dovish Bank of Canada, said Greg Anderson, head of global foreign exchange strategy at Bank of Montreal, by phone from New York.
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, sank 0.9% to C$1.1238 against its U.S. counterpart and reached C$1.1271.
The ruble remained higher versus Bank Rossiis target basket of dollars and euros. It strengthened for a third day as Russia pushed on with its annexation of Ukraines Crimea region and investors wagered the impact of Western sanctions will be mild. The currency gained 0.6% to 42.3433 against Bank Rossiis target basket of dollars and euros.
Sterling was higher versus most major counterparts after minutes of the Bank of England Monetary Policy Committees March 5-6 meeting said the strong U.K. currency is damping inflation. The Office for National Statistics said the jobless rate measured by International Labor Organization methods was 7.2% in the three months through January, the same as in the final quarter of 2013.
The pound strengthened 0.4% to 83.63 pence per euro after depreciating earlier to 84 pence, the weakest level since Dec. 25. It fell 0.3% to $1.6541 after the Fed meeting.
Fed policy makers said that in determining how long to keep interest rates low, they will assess progress toward their goals of maximum employment and 2% inflation. They will take into account a wide range of information, including labor market conditions, inflation expectations and financial markets.
The central bank linked stimulus to unemployment and inflation for the first time in December 2012, saying interest rates would stay low at least as long as unemployment stays above 6.5% and if inflation between one and two years ahead is no more than 2.5%.
The jobless rate has fallen to 6.7%, from a 26-year high of 10% in October 2009. The Feds preferred gauge of inflation, known as the personal-consumption expenditures deflator, has been below 2% for 21 straight months. It rose just 1.2% in January from a year earlier.
The key point is it dropped the 6.5% threshold and moved it to slightly broader and more vague language, Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a phone interview of the Fed. The fact that we didnt see any major surprises shows the recent weakness in the economy is not enough to alter the Feds outlook. Thats positive for the dollar.
Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, said the guidance change was more important for currency markets than the forecast change.
It tends to increase the risk of inflation in the front end of the curve impacting front end nominal yields, Galy said. FX is far more sensitive to the front end of the curve than the back end. The yield curve charts the returns on Treasuries from the shortest maturity to the longest.
Treasury two-year yields jumped seven basis points, or 0.07 percentage point, to 0.44% after the Fed meeting. They increased as much as 10 basis points, the most since 2011. Thirty-year bond yields rose four basis points to 3.66%.
The central bank has lowered monthly bond purchases under its quantitative-easing stimulus strategy from $85 billion last year, citing improvements in the job market and economy. It has undertaken three rounds of bond buying since 2008, swelling its balance sheet to a record $4.2 trillion.