Dollar marches higher, puts commodity currencies under pressure

[December 02, 2014]  By Anirban Nag

LONDON (Reuters) - The dollar rose against a basket of currencies on Tuesday, underpinned by upbeat comments from two influential Federal Reserve officials who stressed the positive impact on the U.S. economy from a decline in oil prices.

While that will keep alive expectations the Fed may start to tighten policy in the middle of 2015, both the European Central Bank and Bank of Japan are grappling with the threat of deflation and the sharp fall in oil prices has only added to their concerns.

The divergence between monetary policy outlooks of the Fed on the one hand and the ECB and the BoJ on the other will be a main driving factor for currencies in the near term, traders said.

Fed Vice Chairman Stanley Fischer and New York Fed President William Dudley said at separate events on Monday that soft oil prices would only temporarily dampen overall U.S. prices. The pair painted a mostly rosy outlook, suggesting the Fed was not letting energy markets distract it from lifting rates.

The dollar index was up 0.4 percent at 88.262, helped by gains against the euro and the yen. The dollar climbed towards 7-year peaks of 119.15 yen with U.S. yields also moving higher after Dudley said it was reasonable to expect a rate hike in mid-2015.

The rate-sensitive two-year Treasury yield rose to 0.5118 percent.

"For U.S. yields to move higher we need to see a good payrolls number this Friday and not only that. We need to see a pick-up in average earnings," said Niels Christensen, FX strategist at Nordea. "That should see the dollar break out of its recent ranges both against the euro and the yen."

Economists polled by Reuters see a November U.S. jobless rate of 5.8 percent, unchanged from October, with 230,000 jobs being added. Average earnings are expected to pick up.

Commodity exporters' currencies fell towards recent lows after Monday's rebound in global commodity prices fizzled out, with traders citing robust sales by Middle East investors of the Australian dollar. The Aussie dollar was down at $0.8449, moving back towards Monday's four-year low of $0.8417.

The U.S. dollar was up 0.3 percent against the Canadian dollar at C$1.1360 and 0.8 percent higher against the Norwegian crown at 6.9922 crowns.

"We believe commodity currencies will be under pressure, especially the Australian dollar, because of weakness in the domestic economy," said Susanne Galler, currency strategist at Jefferies.

"We think there is growing frustration within the Reserve Bank of Australia that the currency is not heading lower. The market is underpricing the risk of a rate cut next year."

Earlier, the RBA left policy unchanged and said a period of stability on rates would be prudent.

(Additional reporting by Masayuki Kitano in SINGAPORE; Editing by Gareth Jones and Crispian Balmer)

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