Dollar Extends Longest Winning Streak Against Yen Since August

  • Rise in manufacturing lifts greenback versus most major peers
  • Volatility on dollar-yen pair declines to an eight-week low

Why a Strong Yen Poses Risk to Japan's Recovery

The dollar extended gains against the yen to the longest streak since August as a report showed U.S. manufacturing expanded in September after unexpectedly shrinking a month earlier.

The improvement in factory output helped boost bets for a Federal Reserve interest-rate increase by December to 60 percent, according to futures prices compiled by Bloomberg. Later this week, a jobs report is forecast to show a pickup in the pace of hiring, economists surveyed by Bloomberg predict, yet it would require a “significant surprise” to move the market substantially, according to John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Denmark.

“Positive U.S. data helps the U.S. dollar higher,” said Hardy, who expects the greenback to rise to 105 per yen by the end of the year. “The hurdle is high for the U.S. data to be meaningful this week. The market feels very unsure of itself after the Bank of Japan and Fed meetings failed to spark a bigger move.”

The U.S. currency has fallen almost 4 percent this year as traders anticipate the central bank will be slow to raise rates amid uneven economic data. Yet the Fed indicated this month it remains data-dependent and is pleased with the progress of the economy.

The dollar rose 0.3 percent to 101.65 yen at 5 p.m. in New York, extending its five-day rally to 1.2 percent. Swings in the U.S. currency versus the yen remain low, with the three-month implied volatility falling to an eight-week low.

The Institute for Supply Management’s index advanced to 51.5 from August’s 49.4 reading that marked the first contraction in six months, figures from the Tempe, Arizona-based group showed Monday. A manufacturing purchasing managers’ index for the U.S. fell to 51.5 in September from 52 in August, yet beat expectations for 51.4 in a Bloomberg survey. Readings above 50 signal growth.

Fed Bank of New York President William Dudley suggested the central bank should be cautious in raising interest rates, given limits on its ability to respond to a recession with borrowing costs close to zero. Fed Bank of Cleveland President Loretta Mester said the economy is ripe for an interest-rate increase and repeated that the Fed’s November meeting should be viewed as “live” for a policy decision, despite its proximity to the U.S. presidential election.

The likelihood the Fed will raise its key rate by year-end is up from 51 percent a week ago, according to data based on futures prices compiled by Bloomberg. The calculation is based on the assumption the Fed’s target trades at the middle of the new band after the central bank’s next boost.

Before it's here, it's on the Bloomberg Terminal.