Dollar builds on rally as Fed prepares ground for December lift off

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[November 05, 2015]  By Anirban Nag

LONDON (Reuters) - The dollar hit a three-month high against a basket of major currencies on Thursday, bolstered by comments from influential Federal Reserve officials who kept chances of an interest rate hike in December alive.

U.S. two-year Treasury yields rose to their highest in 4-1/2 years and spreads over their German counterparts widened to their maximum since late 2006, boosting the allure of the dollar to investors.

The dollar index, which tracks the greenback against six major peers, was up 0.15 percent at 98.135, after having gained 0.8 percent on Wednesday.

The dollar's gains came as chances for a December rate hike rose over 50 percent after Federal Reserve Chair Janet Yellen laid out what appears the base case at the U.S. central bank that the country is ready for higher interest rates.

Driving home the point, William Dudley, the influential president of the New York Fed and a permanent voter on policy, later said the he would "completely agree" with Yellen that December is a "live possibility" for raising rates.
 


"There is a strong momentum for the dollar as rate hike chances for December have improved," said Yujiro Goto, currency strategist at Nomura. "A lot depends on how the U.S. jobs data pans out, but data of late has been encouraging."

Economists expect the U.S. nonfarm payrolls report on Friday to show that U.S. employers have added 180,000 jobs last month. Goto added that a number above 165,000-170,00 along with a tick up in wages would prompt the Fed to start hiking rates in December.

The greenback broke out of its recent 120.00-121.60 range against the yen, to reach a two-month high of 121.85 yen.

With the European Central Bank promising to go the other way - providing more policy stimulus - the euro fell to its lowest in over three months at $1.0834.

Some analysts warned dollar bulls not to get too carried away in the lead-up to the U.S. employment data, leading to some caution.

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Sterling was steady against the dollar <GBP=D4> at $1.5390, but rose against the euro to a 11-week high.

Traders are likely to tread cautiously before the BoE releases its quarterly Inflation Report as well as an interest rate decision and the minutes from its latest Monetary Policy Committee meeting.

The BoE is expected to keep rates at historic lows, with most expecting only MPC hawk Ian McCafferty to continue to vote for an immediate hike. But some reckon two of the nine MPC members may join him.

"Today may see the BoE sharpen up its hawkishness too with a potential 7-2 vote and the Inflation Report and related minutes underlining the need to normalize interest rates over the course of next year," Morgan Stanley said in a note, adding these factors could send the currency higher.

(Editing by Tom Heneghan)

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