Dollar Posts First Monthly Advance Since May on Divergence Bets

  • Chances of Fed rate increase next month climbs to 36 percent
  • Greenback gains versus yen as Kuroda stands ready to ease

The dollar posted its first monthly advance against the yen since May on mounting speculation U.S. monetary policy will further diverge from that of the Bank of Japan.

In the options market, the premium on contracts to buy the yen in a month, compared with those to sell, has disappeared for the first time since November after BOJ Governor Haruhiko Kuroda reiterated on Aug. 27 his readiness to ease further. Federal Reserve Chair Janet Yellen said last week that the case for higher U.S. interest rates has strengthened.

The dollar has rallied since mid-August, paring its loss this year, as the likelihood for a Fed interest-rate increase by December has moved up. Vice Chairman Stanley Fischer said last week a central-bank increase is possible and added Tuesday the Fed would base decisions at its Sept. 21 meeting on economic data, putting added focus on the U.S. August payrolls data due Sept. 2.

The dollar’s recent strength is due to "the Fischer comments made at the end of last week, which has spurred the belief that the September meeting could be very much alive,” said Daragh Maher, New-York-based head of U.S. currency strategy at HSBC Holdings Plc. “The market took that as a validation to continue this mini-rally in the dollar.”

The dollar rose 0.5 percent to 103.43 yen as of 5 p.m. New York time, reaching a one-month high. The greenback strengthened 1.3 percent versus the Japanese currency this month. The dollar was little changed Wednesday at $1.1158 per euro.

Payrolls Focus

Options traders are paying a premium of 0.25 percentage point for one-month contracts to buy the dollar against the yen over those allowing for sales, according to risk-reversal data compiled by Bloomberg. On June 16, the right to purchase the Japanese currency cost 2.97 percentage points extra, the most in six years, according to closing prices.

U.S. employers added 180,000 jobs in August, according to the median forecast in a Bloomberg survey of economists. While that’s down from a 255,000 increase in July, the monthly labor-force number has exceeded expectations in the past two readings. 

The prospect of an increase in U.S. rates as early as next month climbed to 36 percent, from 18 percent at the start of August, according to fed fund futures data compiled by Bloomberg. The chance of an increase by December was 61 percent.

The dollar has been “supported by the recent, more hawkish comments from the Fed which have signaled that the Fed is moving closer to resuming rate hikes,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London.

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