Dollar Supported Before Fed Meeting as Equity Rebound Sinks Yen

  • Futures show 76% likelihood that Fed will act on Dec. 16
  • Yen pares weekly gain as Japan stocks rally after 3-day drop

The dollar rose for a second day against the yen ahead of next week’s Federal Reserve meeting, when investors anticipate policy makers will raise interest rates for the first time in almost a decade.

The greenback advanced against most of its developed-market peers Friday, a day after posting its first gain in three sessions versus the yen and euro. Japan’s currency dropped the most in a week, trimming its best weekly performance for three months, as the nation’s stocks rallied from a three-day slide. Australia’s dollar extended its biggest weekly decline in a month after key export iron ore experienced its longest slump since 2008.

“A U.S. rate hike is mostly a done deal, and there’s potential for some dollar buying,” said Masakazu Satou, a currency adviser at Gaitame Online Co., a retail foreign-exchange brokerage in Tokyo. “There seems to be a pause in risk-off sentiment,” lifting Japanese stocks and weakening the yen.

The dollar strengthened 0.3 percent to 121.93 yen as of 7:24 a.m. in London, headed for the biggest gain since Dec. 4. It was little changed at $1.0942 per euro, holding Thursday’s 0.8 percent advance.

Japan’s currency has gained 1 percent this week versus the greenback, the most since the period ended Sept. 4. The euro has risen more than 3 percent over the past two weeks, the best performance since August.

Japan’s Nikkei 225 Stock Average rebounded 1 percent on Friday, snapping a 3.3 percent, three-day decline.

Ore Price

Australia’s currency slid 0.4 percent to 72.51 U.S. cents, extending its drop since Dec. 4 to 1.2 percent. The price of iron ore, the nation’s biggest export, has fallen for nine weeks.

“The ‘two-tier USD’ –- rising against commodity-linked and EM currencies, but doing less well against DM surplus currencies –- has returned,” Morgan Stanley analysts, led by London-based Hans Redeker, wrote in a Dec. 10 client note, referring to emerging and developed market exchange rates.

Futures contracts showed a 76 percent probability that the Fed will raise rates for the first time since 2006 on Dec. 16. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

Wagers on dollar strength versus eight peers rose to the highest in three months in the week ending Nov. 24, according to data compiled by Bloomberg.

“We continue to think the market should, over time, gravitate to a more stable broad USD strength dynamic, with the USD gaining both vs. low-yielding funding currencies and commodity exporter currencies,” analysts at BNP Paribas SA, including Daniel Katzive, head of foreign-exchange strategy for North America, wrote in a note.

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