Dollar climbs toward seven-month highs, bolstered by Fed rate hike bets

[November 10, 2015]  By Anirban Nag

LONDON (Reuters) - The dollar rose towards a seven-month peak against a basket of major currencies on Tuesday, bolstered by widening rate differentials in favor of U.S. Treasuries on expectations the Federal Reserve will raise interest rates next month.

The dollar index gained 0.2 percent to 99.185, moving toward Friday's peak of 99.345, a high not seen since mid-April. Against the yen, the dollar was buying 123.22 yen, flat on the day and not far from the previous day's 2-1/2-month high of 123.60.

The euro traded at $1.0722, not far from Friday's seven-month low of $1.07045, having lost 2.5 percent so far this month.

Analysts said the widening spread between 10-year Treasuries and German Bunds, currently at 169 basis points, was likely to underpin the dollar and keep the euro on the defensive.

The single currency had come under pressure on Monday after four governing council members said a consensus is forming at the European Central Bank to take one of its benchmark interest rates deeper into negative territory in December.

Talk of a cut to the ECB's -0.2 percent deposit rate dragged euro zone bond yields lower on Tuesday. [GVD/EUR]

"If the Treasury/Bund spread rises above 170 basis points, we could see some more fragility in the euro," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "Until it stays below $1.0820, the path of least resistance for the euro will be to the downside."

Governing council member Erkki Liikanen said on Tuesday the central bank has not decided yet whether to cut its interest rates and will make a decision when it meets in December. He added the ECB is "willing and able" to act to achieve its price growth target.

In sharp contrast to the ECB, the Fed is considered very likely to tighten U.S. monetary policy in December for the first time in nearly a decade, following Friday's robust jobs data.

Even Eric Rosengren, the dovish president of the Boston Fed, pointed to December as an appropriate time to begin raising rates, bolstering a view that the ground was being prepared for a lift off next month.

"The U.S. is out in front on its own, and everyone else is heading the other way. In that case, positioning becomes very key, if the interest-rate story is going to be center," said Bart Wakabayashi, head of foreign exchange for State Street Global Markets in Tokyo.

(Additional reporting by Lisa Twaronite; Editing by Catherine Evans)

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