By Anora Mahmudova and Sara Sjolin, MarketWatch
Turkish lira takes a hit on New Year's Eve attack
The U.S. dollar extended robust gains after stronger-than-expected manufacturing data on Tuesday, lifting a key dollar index to its highest level in more than 14 years.
The ICE dollar index jumped 1.4% to 103.69 as the greenback rose against most other major currencies. The gauge is touching levels last seen in December 2002, according to FactSet data.
The ISM manufacturing index (http://www.marketwatch.com/story/manufacturers-most-upbeat-in-two-years-ism-survey-shows-2017-01-03)rose to 54.7% in December. A reading of 50 or greater points to expansion. Meanwhile, construction spending (http://www.marketwatch.com/story/construction-spending-jumps-in-november-2017-01-03) rose 0.9%, with both reports coming in stronger than forecast by economists polled by MarketWatch.
Even before the data, the greenback was higher on Tuesday with analysts suggesting that the dollar strengths was a continuation of the momentum seen in the last quarter of 2016.
"The dollar rally is being driven by enormous investor expectations that the relatively strong U.S. economy will accelerate even further under the leadership of [President-elect] Donald Trump who is expected to stoke growth through fiscal stimulus and deregulation," said Boris Schlossberg, managing director of FX strategy at BK Asset Management. The dollar has risen 4.6% over the last quarter on prospects of inflation growing and higher interest rates.
Indeed, the dollar index ended 3.6% higher in 2016, its fourth straight year of gains.
"The last two weeks in December were clearly a pause inthe dollar rally and investors continue to bet on a stronger dollar in 2017," said Neil Mellor, chief currency strategist at BNY Mellon.
The dollar traded sideways late December, but gained 4.6% over the fourth quarter on expectations that the Federal Reserve would raise interest rates at a more rapid clip than had previously been expected. The market is pricing in two rate increases in 2017, according to CME Group data, while the Fed's projection of rate increases this year, its so-called dot plot, implies three moves, an increase from its earlier projection in September of two rate increases this year.
"Mr. Trump's policies will take months to be put into effect, but in the meantime the markets will need to key off the U.S. data. Given the very high expectations, the possibility of disappointment is high," Schlossberg added.
Meanwhile, the euro was one of the biggest decliners against the dollar on Tuesday, falling to $1.0360, down from $1.0467 late Monday in New York.
Some analysts expect more potential downside risk for the single currency in 2017, which could pull it down to parity with the greenback.
"Over the past decade China has diversified its foreign holdings away from the dollar and into the euro. The recent devaluation of the yuan forced them to sell their dollars, but soon, they might start selling their euros, further putting pressure on the single currency," said Mellor.
Mellor noted that the weakness in the euro and the yen is a positive for their respective central banks.
"The ECB and [Bank of Japan] are only happy to see the dollar strengthen to allow their economies to recover. But it has a negative impact on emerging markets and the Fed will be very careful not to let the dollar strengthen too much," Mellor said. "One of the risks for the dollar is the Fed tightening too soon too much," he said.
The yen also slid, with the dollar fetchingYen118.16, up from Yen117.41 on Monday.
In other currencies, the pound jumped after the U.K. manufacturing purchasing managers index for December soared to a 30-month high (http://www.marketwatch.com/story/uk-manufacturing-pmi-jumps-to-30-month-high-2017-01-03). Sterling bought EUR1.1790, up from EUR1.1739, its strongest level against the euro since Dec. 22, according to FactSet.
The pound changed hands at $1.2243, compared with $1.2287 on Monday.
Among emerging-market currencies, Russian ruble strengthened 1.3% against the dollar, with the dollar fetching 60.4670 rubles, down from 61.2465, thanks to a jump in oil prices. The ruble is still near 13-month lows against the buck.
And the Turkish lira plunged to new lows after the terrorist attack on a night club on New Year's Eve. The dollar bought 3.5948 lira, up from 3.5436 on Monday.
(END) Dow Jones Newswires
January 03, 2017 10:44 ET (15:44 GMT)
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