Dollar Shakes Off Yuan as Jump Turns Focus Back to U.S. Rates

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Can Anything Scare Fed Away From Rate Hike?

Interest rates are back in focus for currency traders and the dollar is re-emerging as a winner.

The U.S. currency rose against 13 of its 16 major peers, shaking off China’s devaluation of the yuan last week that had fueled several days of speculation that the Federal Reserve would delay raising official borrowing costs. Investors this week are looking anew at a possible Fed increase as currencies from commodity-producing nations and emerging markets were undercut by the drop of oil and raw materials prices.

“The rates story has come back into play,” said Alvin T. Tan, a foreign-exchange strategist at Societe Generale SA in London. “What happened with the Chinese revaluation was that there was risk off, and so interest rates tumbled. Against emerging market and commodity currencies, dollar strength should continue.”

The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers, rose 0.2 percent to 1,211.39 at 7:27 a.m. New York time, after sliding 0.3 percent last week. It touched an almost five-month high of 1,220.25 on Aug. 7.

The dollar climbed 0.5 percent to 8.2636 krone, the currency of Norway, western Europe’s biggest crude oil producer. It strengthened 0.2 percent to $1.1090 per euro, and appreciated 0.2 percent to 124.54 yen. The U.S. currency was little changed at $1.5632 per pound.

Dollar Positioning

Bullish dollar bets climbed to a six-month high in the week through Aug. 11, just before China’s devaluation halted the greenback’s gains. The U.S. currency then posted its biggest weekly drop since June 19.

That decline coincided with futures traders reducing the odds that the Fed will raise rates in September to as low as 40 percent, from as high as 54 percent on Aug. 7, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. The probability had bounced back to 50 percent on Monday.

The U.S. economy is performing the best since February, relative to analyst estimates, according to a Bloomberg gauge.

“September remains our base case for the first rate hike,” RBC Capital Markets LLC analysts, including New York-based chief U.S. economist Tom Porcelli, wrote in a client note dated Aug. 17. “Purely from a fundamental U.S. economic perspective, the events in China are unlikely to impact the U.S. economic data in a significant, adverse way. But it should not be lost on anyone that the calculus for the Fed is not that simple.”

A 7 percent gain in the dollar gauge this year has yet to turn Dan Fuss into a U.S. currency bull even as his Loomis Sayles Bond Fund faces its worst loss since 2008. He still likes the currencies that have hurt him in 2015, including the Australian and New Zealand dollars, in part because he doesn’t believe the greenback’s rally will last.

Rand, Aussie

South Africa’s rand dropped 0.7 percent to 12.9170. Australia’s dollar fell 0.4 percent to 73.49 U.S. cents.

National Australia Bank Ltd. cut forecasts for the Aussie for the end of September to 72 U.S. cents from 74, and predicted a bottom of 68 at the end of March.

“The market is not pricing the Fed’s expected September hike adequately,” analysts at the lender, including Sydney-based head of market research Peter Jolly, wrote in a client note.

(A previous version of this story corrected the time reference in the fourth paragraph.)

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