Dollar rally is back on support of interest-swap rates

The US currency is surging again, but this time with support from the interest-rate market. The US dollar rally registered its strongest gain during the past six months against Euro as two-year dollar interest rate swaps shot over those in the shared-currency area.

The US dollar suffered from a drop in March when the strength of greenback was eroded by a differential in interest swaps dropped.

Higher US interest rates over European rates are indicating the under current sentiment that US Federal Reserve will rise benchmark interest rate in next policy meeting scheduled in December 2015. 

The difference between the US dollar and Euro area two-year swap rates further widened by 5 basis points in November and touched 1.02 percentage points.

Greenback against Euro touched its highest in six months. US two-year rate swaps surpass Euro area's by most since 2007. The derivatives market is also moving in line of currency markets in the past two years. European central banks are keen on their monetary stimulus plans.

The US dollar rose 0.3 percent to $1.0724 against Euro in New York currency market and this is strongest level of greenback since 15 April 2015. The US currency rose 2.6 percent this month and nearing $1.0458 level recorded in March and this level is highest since January 2003. 

The US dollar paused on Monday before starting to surge. The US dollar against euro rose 0.1 percent on Tuesday. Higher US interest rate swaps are the main reason for putting money in the dollar as it's more attractive for fund managers. 

The dollar's competing currencies such as euro swaps have negative interest rates. This situation has made US dollar attractive for parking funds. Majority of banks are anticipating the US dollar is likely to surge throughout the year end. 

Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA, said: "The US rates are now doing most of the work in the divergence story. The US front-end yields will keep moving higher as long as the Fed keeps hiking. We'll see how much higher the Fed can push the dollar."

The US dollar rose to six-month high against Euro and seven-month high against Swiss franc (CHF). The dollar index is hovering at its highest since April. It rose 0.4 percent to 99.371 and surpassed Friday's high recorded after the job report. The dollar's gain puts pressure on gold. Spot gold was down 0.3 percent to $1.088.06 an ounce. 

The speculation about possible rate hike by US Fed is making rounds in the global markets. The stronger than expected data on US labor market is giving extra space for rate hike speculation. Forex traders give 66 percent chances for the rate hike from near zero level.

Before the labor data, the probability was 56 percent after the encouraging numbers, the chances are much brighter now. It's estimated that effective Fed funds rate averages 0.375 percent after the first hike. 

Forex analysts predict that dollar surge may continue by another five percent. If Fed hikes interest rate, this'll bringing money to park on the short end of the yield curve. Bloomberg Dollar Spot index rose 0.1 percent showing its highest level in over decade. The Dollar index tracks the greenback against 10 major global currencies.