The U.S. dollar rose to a four-year high as Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. forecast further strength amid bets the Federal Reserve will raise interest rates before its peers do.
The greenback reached its strongest since November, 2012, versus the euro, in response to data to be released Friday that are forecast to show U.S. economic growth quickened. The Canadian dollar declined 0.41 cents to 90.03 cents (U.S.), after Bank of Canada officials indicated this week that the bank may not follow U.S. rate hikes. New Zealand's dollar slid to a one-year low as the nation's central bank signalled possible intervention.
"Central-bank divergence is probably one of the keys to this dollar rally," Lennon Sweeting, a San Francisco-based dealer at the broker and payment provider USForex Inc., said in a phone interview. "That divergence will only get greater as Europe tries to take a more accommodative stance and stimulate the economy there, while the U.S. does appear to be on an upward trajectory."
Bank of Canada senior deputy governor Carolyn Wilkins said on Monday that once the Canadian economy returns to operating at full capacity and inflation stabilizes around the bank's 2-per-cent target, the bank may not be in a rush to lift interest rates to the "neutral" level, which it believes to be between 3 and 4 per cent. Two days later, deputy governor Timothy Lane said that Canadian monetary policy is "independent and can diverge from the Fed's policies."
Goldman Sachs and Bank of America highlighted in client notes diverging monetary policy in the U.S. and Europe as a source of further strength for the U.S. dollar. Morgan Stanley also wrote that it sees the rally continuing, thanks to positive economic data and expectations for rising U.S. government bond yields.
There's a 75 per cent chance the Fed will raise its benchmark target rate by September, 2015, according to data compiled by Bloomberg based on federal funds futures.
"There's demand for the dollar," said Richard Cochinos, head of Americas Group of 10 currency strategy at Citigroup Inc. in New York.
"In the context of concerns about overall global growth, the U.S. is sticking out as an island of stability."
A government report on Friday is forecast to show U.S. gross domestic product grew 4.6 per cent in the second quarter, more than the previous estimate of 4.2 per cent released Aug. 28.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major peers, increased 0.3 per cent to 1,062.73, the highest close since June, 2010. It has gained 5.9 per cent since June 30, headed for the biggest quarterly advance in three years.
The yen gained versus 31 major peers after Japan's Health Minister signalled there's no hurry on public-pension-fund changes that may boost investment in overseas assets. The yen strengthened 0.3 per cent to ¥108.70 per dollar after depreciating 0.3 per cent earlier to ¥109.37.
A measure of currency-market price swings increased for a fourth day, the longest stretch since July. JPMorgan Chase & Co.'s Global FX Volatility Index rose to 7.7 per cent. The average this year is 6.89 per cent.
The Bloomberg Commodity Index of 22 raw materials fell 0.4 per cent, approaching the lowest level since 2009.
Bloomberg News, with files from Globe and Mail reporter David Parkinson