Dollar heads for third
weekly gain as U.S. rate rise bets firm
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[October 21, 2016]
By Patrick Graham and Jemima Kelly
LONDON
(Reuters) - The dollar was on course for its third consecutive week of
gains against the basket of currencies used to measure its broader
strength on Friday, driven to an eight month high by hardening
expectations of a rise in interest rates in December.
In a year where investors have never really got close to fully pricing
in a move, short-term U.S. rates now put a 75 percent probability on the
Federal Reserve raising official borrowing costs for only the second
time in more than a decade.
After a blip in the first half of this week, comments by New York Fed
President William Dudley and Donald Trump's failure to register a big
win in Wednesday's presidential debate has hardened that view, fueling
another surge for the greenback.
European Central Bank chief Mario Draghi's quashing of speculation it
was already considering how to wind down bond purchases when the time
comes also cooled any signs of recovery for the euro, sending it below
$1.09 for the first time since March.
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"The dollar strength is more of a continuation of yesterday’s move, when
rate hike expectations for December rose somewhat on the back of the
data. This morning I think is just a continuation of that move," said
Esther Reichelt, a strategist with Commerzbank in Frankfurt.
By 1130 GMT (0730 EDT), the dollar index <.DXY> was up 0.2 percent on
the day, having briefly passed March highs. The euro fell a third of a
percent to $1.0891.
Some analysts said that investors were again shifting towards "carry"
trades that use the expanding difference between interest rates on the
dollar and those in other currencies to rack up profit.
"The euro was left bruised and battered after the October ECB meeting,"
analysts from Credit Agricole said in a note to clients.
"We suspect that the euro has also been dragged lower by its appeal as a
funding currency at a time when the G10 FX carry trade is staging a
return. This is consistent with the single currency having broken to new
lows against G10 high-yielding and commodity currencies recently."
Another reason for seeking the security of U.S. assets is the steady
depreciation of China's yuan, which dropped to its lowest level in six
years against the broadly stronger greenback.
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U.S. dollar and euro banknotes are seen in this picture
illustration, March 16, 2015. REUTERS/Heinz-Peter
Bader/Illustration/File Photo
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Beijing spent almost a trillion of its dollar reserves fighting a fall in the
currency to similar levels earlier this year but has moved to targeting a
broader basket of currencies, meaning dollar gains globally naturally shift the
exchange rate.
But with most trade with China still done in dollars that may not ease fears of
another deflationary impulse for Western economies as a result.
Sterling, whose 20 percent fall has been the biggest story of the past three
months among the majors, was also back on the defensive in the face of the
dollar's strength.
The language from European officials towards Britain at Prime Minister Theresa
May's first summit since June's vote for a Brexit from the EU did not augur well
for the pound. French President Francois Hollande said if May wanted a "hard"
Brexit, then negotiations would be very tough.
The pound, generally more stable this week, lost 0.3 percent to $1.2212 and was
flat against the euro.
($1 = 0.9152 euros)
(Editing by Toby Chopra)
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