Dollar Advances to 7-Month High as Fed Rate-Hike Sentiment Grows

  • Signs of economic upturn add scope for central bank move
  • Greenback gauge heads for its best monthly gain since May

Is a Fed Rate Hike in December Definite?

The dollar advanced to the strongest since March amid increased confidence that the Federal Reserve will raise interest rates this year.

The greenback appreciated against most major currencies with the likelihood for the Fed to tighten monetary policy in December rising to 74 percent, according to futures data. A gauge of the U.S. currency was on track for the biggest monthly increase since May.

The rise in the dollar that began in August amid evidence of faster economic growth and accelerating inflation suggests that currency traders have yet to fully price in the prospect of higher U.S. rates in coming months. A U.S. government report Friday is forecast to show economic growth picked up in the third quarter, adding to the case for the Fed to tighten policy.

“The key dollar driver today was a modest shift in Fed hike expectations for the December meeting and into 2017,” said Ian Gordon, a foreign-exchange strategist at Bank of America Corp. in New York.

The Bloomberg Dollar Spot Index, which measures the U.S. currency’s performance against a basket of 10 major counterparts, rose 0.3 percent at 5 p.m. in New York, touching the highest since March 16. The gauge is up 2.5 percent this month.

Treasury yields rose for a second day as futures trading indicated increased probability the Fed will tighten policy by year-end, up from 68 percent a week ago. The Federal Open Market Committee will next meet on Nov. 1-2 before the Nov. 8 U.S. presidential election. The central bank raised its rate target in December 2015 for the first time in nearly a decade.

Economic Growth

Data released on Thursday showed jobless claims declining for the first time in three weeks, while orders for capital goods fell by the most since February, although the figure for the prior month was revised up.

“We had reasonably good data this morning,” said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal. It helped increase rates on short-term interest-rate swaps and supported the dollar. “That seems to be the biggest catalyst,” he said.

U.S. gross domestic product expanded at a 2.6 percent annual rate in the third quarter, according to the median estimate in a Bloomberg survey of economists, up from a 1.4 percent rate in the second quarter. The U.S. added 173,000 jobs this month, according to a Bloomberg survey, up from 156,000 the prior month, before the employment report scheduled for Nov. 5.

The dollar rose 0.8 percent to 105.29 yen, reaching the strongest level versus the Japanese currency since July 29. Brad Bechtel, a currency strategist at Jefferies Group LLC in New York, sees scope for the dollar to strengthen to 108 yen by the end of the year amid growing divergence between the monetary policies of the U.S. and Japan.

“The combination of dollar strength and renewed yen weakness should be enough for us to finally move back through 105 again,” Bechtel said. “The dollar side may cool off as we get closer to the rate hike in December in the U.S., but the yen side should continue to weaken amid the new policies out of the Bank of Japan.”

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