Dollar Rises Most in Two Weeks as Wagers for Fed Tightening Rise

  • Advance in manufacturing data bolsters economic outlook
  • Fed’s Lacker, Mester urge increase in U.S. interest rates

U.S. Jobs Data Eagerly Awaited for Rate Hike Signals

The dollar appreciated the most in two weeks as comments from Federal Reserve officials boosted speculation the central bank will increase interest rates this year.

The greenback gained against all of its major peers as Fed Bank of Richmond President Jeffrey Lacker urged the central bank on Tuesday to tighten policy to stem a likely increase in inflation. Fed Bank of Cleveland President Loretta Mester said on Monday the economy is ripe for a rate increase, while a report showed U.S. manufacturing expanded in September.

“We have seen U.S. rate expectations pushing up in the wake of manufacturing ISM yesterday,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “Provided that the data this week remains supportive, expect the U.S. dollar to remain well bid.”

The improvement in factory output helped boost bets for a Fed rate increase by December to 61 percent, according to futures prices compiled by Bloomberg. A U.S. jobs report due later this week is forecast to show a pickup in the pace of hiring, which may raise the prospect that rates will rise, boosting the allure of the greenback.

The Bloomberg Dollar Spot Index, a gauge of the U.S. currency against 10 major peers, rose about 0.6 percent at 5:03 p.m. in New York. The greenback advanced 1.2 percent to 102.90 yen, extending its rally to six days, the longest winning streak since August.

The probability of a rate hike by December rose 11 percentage points from a week earlier, futures data show. 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. 

Fed Watch

The Federal Open Market Committee left its policy rate unchanged in September, noting the case for an increase had strengthened and described risks to the economic outlook as “roughly balanced.”

Lacker, who dissented twice last year in favor of raising interest rates, urged the central bank to tighten policy to head off a likely pickup in inflation that would force bigger increases later. Mester said the Fed’s November meeting should be viewed as “live” for a policy decision, despite its proximity to the U.S. presidential election.

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. The U.S. probably added 174,000 jobs in September, according to the median estimate in a Bloomberg survey of economists, up from 151,000 the month before.

“Strong PMI numbers yesterday offers a good lead-in for nonfarm payrolls, while Lacker and Mester were both hawkish in the past two sessions,” said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank. “I doubt the Fed is really considering a November hike, given the proximity to the election, but I think she is solidifying the case for December.”

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