US dollar heads for best week in a year on Fed outlook

DollarIf the economy improves and the Fed cuts back on its stimulus, the dollar will benefit. (Reuters)

The U.S. dollar was headed for its biggest weekly gain in almost a year against major currencies on Friday after the Federal Reserve fueled expectations of an eventual end to ultra-loose U.S. monetary policy.

The euro fell to a two-week low against the dollar as interest rate differentials moved in favour of the U.S. currency and on a re-emergence of Greece's political turmoil.

The dollar surged and assets like stocks and bonds fell after Fed Chairman Ben Bernanke said on Wednesday the economy was improving enough for the central bank to begin scaling back its monthly $85 billion in asset purchases. That prompted traders to start pricing in an interest-rate hike in late 2014.

"We're very bullish right now on the U.S. dollar," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

Woolfolk said the dollar is likely to gain regardless of Fed actions on tapering. If the economy improves and the Fed cuts back on its stimulus, the dollar will benefit from expectations of higher interest rates. But if the Fed maintains stimulus because the economy is weak, the dollar will rise on safe-haven demand, he said.

Against the currency basket, the dollar rose to 82.271, the strongest since June 6. It was last up 0.4 percent at 82.194 and was on track for a weekly gain of 2 percent, the biggest since early July, 2012.

Analysts said expectations of the Fed slowing the pace of its stimulus also led to a degree of uncertainty in financial markets, which will also boost the dollar.

"Players will likely park (assets) in the dollar until we have got a little more clarity about where the world is going," said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank in London. "The dollar is benefiting from that and I sense it will continue to do so."

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