Expectations for 2015 Rate Increase Fuel Dollar's Rally

Dow Jones Newswires

The U.S. dollar started 2015 strongly, with an index tracking its value against a basket of other currencies surging to a nearly nine-year high Friday, spurred by expectations that the Federal Reserve will raise interest rates this year.

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Accentuating the gap between the stance of the Fed and that of other major central banks, European Central Bank President Mario Draghi told German daily Handelsblatt in an interview published Friday that interest rates in the currency bloc are set to stay lower for longer.

Mr. Draghi also said preparations are being made to "alter the volume, tempo and content of [ECB] measures early in 2015, if needed, to respond to a period of inflation that is too low," fanning speculation that a sovereign-bond-buying program could be implemented sooner rather than later.

That pushed Spanish and Italian government bond yields to euro-era lows of 1.52% and 1.77%, respectively. The 10-year German bund yield also declined to a fresh record of just 0.52%. Bond yields fall as prices rise.

The euro also weakened on the comments, but strategists said that the move was more a reflection of the broad rally in the dollar, spurred by the strength of recent economic data there, which in turn is fuelling hopes of an imminent rate raise.

In still holiday-thinned European trade following Thursday's New Year's Day holiday, the ICE U.S. dollar index rose by 0.6% to touch 90.80--its highest level since March 2006.

"The economic data flow over the holiday period will have in general reinforced the view that the U.S. economy continues to strengthen which will make the Fed more comfortable to begin raising rates from the middle of this year," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

"The annual rate of real [gross domestic product] growth is now running at 2.7% and is likely to accelerate further in the coming quarters as economic growth remained strong heading into year-end," he added.

The euro fell 0.2% to $1.2035, marking its lowest level since June 2010, while the British pound hit its lowest level against the buck since August 2013. The buck also cranked higher against emerging-market currencies such as the Brazilian real and Turkish lira.

The U.S. index of consumer confidence increased to a two-month high of 92.6 in December from a revised 91.0 in November, figures showed Tuesday. Consumers are the main driver of economic growth in the U.S., especially in the fourth quarter, when households buy gifts and other items during the year-end holiday season. On Friday, The S&P 500 climbed 0.5% in early trade.

In European stock markets the picture was more mixed.

Having fallen sharply on after eurozone manufacturing data came in weaker than expected, the Stoxx Europe 600 later recovered spurred by hopes that the weaker figures may also heap more pressure on the ECB to act.

The manufacturing purchasing managers index for December was revised to 50.6 from a preliminary estimate of 50.8.

"While we are convinced that activity will gradually recover on the back of lower oil prices, these data support the case for more [ECB] monetary-policy stimulus," said Luigi Speranza, economist at BNP Paribas.

Mr. Speranza said that he continued to expect the ECB to announce a broadening of its asset-purchase program, including purchases of sovereign bonds, at its next meeting on Jan. 22,

Germany's DAX was down 0.2% early afternoon, while France's CAC rose around the same amount. Italy's FTSE MIB rose 1% and Spain's Ibex arounfd 1.2%.

London's FTSE 100, packed full of oil- and gas-dependent companies, struggled to cling to a slim gain as Brent crude declined an additional 2% to just over $56 per barrel, having in 2014 posted its largest annual loss since the global recession in 2008. Gold was 0.8% lower at $1,176.60 a troy ounce.

Monica Houston-Waesch

contributed to this article.

Write to Josie Cox at josie.cox@wsj.com