Dollar Rises on Signs of Economic Strength, New Fed Chief Talk

  • Spain crisis serves as reminder of cracks in EU: Citigroup
  • If Yellen isn’t reappointed, someone hawkish may be: Sumitomo

JPM's Normand Says Clients Should Be Long Dollar

The dollar rose for a second day after U.S. factory data released Monday beat estimates, supporting the case for the Federal Reserve to raise interest rates. The Aussie dropped after the Reserve Bank of Australia said a stronger currency would hurt growth.

Themes including risks related to the Catalan independence vote and speculation about a more hawkish new Fed chief continued to support the dollar, said Mansoor Mohi-uddin, head of currency strategy in Singapore at NatWest Markets, a unit of Royal Bank of Scotland Group Plc. The U.S. administration will announce the next Fed chair in a few weeks.

“Dollar strength is likely to extend,” said Mohi-uddin. “The market is short greenback and investors are increasingly focused on the Fed resuming rate hikes.”

The dollar is “on the move” and recent gains are poised to continue because of the strength in the economy and prospects for more interest-rate increases, according to analysts at Goldman Sachs Group Inc.

  • Bloomberg Dollar Spot Index rises 0.3%, adding to gain of 0.5% on Monday; 10-year Treasuries yield advance 1bps to 2.35%
    • If Yellen is not reappointed as the next Fed chair, somebody more hawkish could be named, which would be dollar-supportive, says Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp in New York
  • USD/JPY climbs as much as 0.4% to 113.17, surpassing Monday’s high and approaching it last week’s high of 113.26, which was strongest since July 14
    • “The capitulation of dollar longs a month ago gives us a clean slate, and creates a backdrop that’s conducive to a new dollar rally,” says Gareth Berry, a foreign-exchange and rates strategist at Macquarie Bank in Singapore
  • AUD/USD declines as much as 0.5% to 0.7792
    • RBA kept rates at 1.5%, while repeating that a higher exchange rate will contribute to subdued price pressures; says employment continues to grow strongly though wage growth remains low
  • EUR/USD falls 0.2% to $1.1706
    • There’s the possibility the Catalan government declares independence after the violence this weekend, according to a note from Citigroup
    • The national government could strip out Catalonia’s autonomy and call for regional elections, which would certainly lead to widespread civil unrest
    • Even if they do not declare independence on Tuesday, the crisis serves as a reminder of the cracks in the wall in the EU

— With assistance by Michael G Wilson, and Mika Otsuka

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