Momentum builds behind dollar as eyes move to jobs data

[November 04, 2015]  By Patrick Graham

LONDON (Reuters) - The dollar inched towards 2-1/2 month highs against a basket of currencies on Wednesday, buoyed by returning expectations of a rise in U.S. rates and better growth globally, which has prodded yields on U.S. government bonds higher this week.

The euro, a sufferer since the European Central Bank sent a strong message last month on the prospect of more cuts in interest rates and other monetary easing, slid another third of a percent after a speech by ECB chief Mario Draghi.

The Federal Reserve's delay in raising interest rates in September had many investors and analysts predicting it would hold fire long into next year. But a bundle of more hawkish signals two weeks ago has turned that on its head.

Major banks say the resulting surge against the euro <EUR=> and a handful of other currencies has drawn many investors back into last year's big consensus trade of a push by the dollar towards parity with the euro.

Societe Generale strategist Kit Juckes pointed to Tuesday's more than half percent gain against the euro as evidence of gathering momentum behind the U.S. currency.

"A break of the $1.08-1.16 range wasn't threatened, so we shouldn't overstate the move's significance," he said. "(But) my impression is that it reflects a rapid build-up of euro shorts as the speculative community re-engages with a favored trade."

The euro had dipped another 0.3 percent to $1.0926 by 1135 GMT. Against a basket of six major rivals, the dollar stood at 97.42, up about 0.3 percent and heading toward a 2-1/2-month high of 97.818 touched last week.

Against the yen, the dollar rose about 0.2 percent to 121.23, pulling away from Tuesday's low of 120.60.

Asian shares surged after an overnight rally on Wall Street that pushed U.S. Treasury prices down. The benchmark 10-year note yield stood at 2.2106 percent, just off a 1-1/2-month peak of 2.225 percent.

"Yields went up, which helped lift the dollar ahead of U.S. payrolls data later in the week," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.

Economists expect U.S. employers to have added 180,000 jobs last month according to a Reuters poll. The nonfarm reading on Friday will be preceded by ADP numbers and the ISM survey of manufacturing on Wednesday. Upbeat reports would add to bets on a December move by the Fed.

Chinese and European surveys also helped sentiment. Activity in China's services sector expanded at its fastest pace in three months in October thanks to stronger new business.

European purchasing manager indices were mixed compared to expectations but all pointed to growth, and there is a broader sense that markets are feeling much more sanguine about the resilience of the global economy than they were two months ago. A Barclays survey of 650 global investors on Tuesday suggested the perceived risks to financial markets posed by a rise in U.S. interest rates are at their lowest point in two years.

"The timing and pace of Fed tightening into 2016 will guide the extent of any broad-based USD gains but policy easing by other central banks will ensure the USD can continue to move moderately higher," said Jane Foley, currency strategist with Rabobank in London.

Meanwhile, a further decline in dairy prices and soft New Zealand jobs data battered its dollar currency.

Against the U.S. dollar, the kiwi slid about 0.4 percent to $0.6636, peeling back from highs near 68 U.S. cents set in the past three sessions.

(Additional reporting by Lisa Twaronite; editing by John Stonestreet)
 

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