LONDON: The dollar was on way to end 2014 with expand of 12 percent against a basket of top currencies, and expected U.S. interest rate climbs may strengthen its appeal in the New Year.
This year’s gain will be the dollar’s largest since 2005, when it climbed nearly 13 percent.
The divergence between the U.S. Federal Reserve’s path toward rate hikes and stimulative monetary policies in the euro zone and Japan has helped the dollar index hit an eight-year high this year, and is likely to remain a key theme in 2015.
Recent solid data has reinforced the view that the U.S. economy is improving enough for the Federal Reserve to consider raising interest rates in mid-2015.
The dollar index, which measures the greenback’s value against a basket of six major currencies, last stood at 89.926.
On Tuesday, it touched a high of 90.325, its strongest level since 2006.
Underscoring its broad strength in 2014, the greenback is on track for annual gains against each of the currencies in the dollar index basket, namely the euro, yen, sterling, the Canadian dollar, the Swedish crown and Swiss franc.
The greenback has also risen this year versus the Australian dollar, New Zealand dollar and Norwegian crown.
Against the yen, the dollar held steady on Wednesday near 119.44 yen. The dollar had touched a one-week low of 118.86 yen on Tuesday, having pulled back from a seven-year high of 121.86 yen in early December.
Investor jitters over looming economic risks such as political turmoil in Greece have helped to support demand for the safe haven yen this week, along with year-end profit-taking on bullish dollar bets.
Still, the dollar has risen more than 13 percent versus the yen this year. The gains accelerated as the yen slid after the Bank of Japan surprised markets in late October by expanding its monetary stimulus to keep inflation expectations from flagging.
Over the course of 2015, the general direction of the dollar against the yen will probably be higher, said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.
For 2015, “if you ask whether the dollar is likely to head in the direction of 100 yen or head toward 130 yen, I think it will be the latter,” Ino said.
Still, it could be a bumpy ride.
The fact that market participants are already positioned for further yen weakness may help temper gains for the dollar against the Japanese currency, and the yen could gain a near-term boost if worries about Greece intensify, Ino added.
The euro inched up 0.1 percent to $1.2163. On Tuesday, it reached a 29-month low of $1.2123. The euro is down 11.5 percent for the year, on track for its biggest annual drop since 2005.
Greece’s parliament failed to elect a president on Monday, paving the way for early general elections on Jan. 25 and throwing the country into a period of political turmoil.
The markets are now concerned that the leftwing opposition Syriza party may win the election and derail Greece’s international bailout.
The Greek political situation adds to the burden placed on the common currency, already weighed down by prospects of the European Central Bank implementing further easing steps in 2015 to shore up the euro zone economy and ward off deflation.