Dol­lar in­dex at 4-month high on strong US data, Fed hike hopes

The Pak Banker - - MARKETS/SPORTS -

The dol­lar hit a four­month high against a basket of cur­ren­cies and rose against the yen on Wed­nes­day, bol­stered by strong U.S. data and grow­ing ex­pec­ta­tions that the Fed­eral Re­serve may raise rates be­fore the end of the year.

Com­merce Depart­ment data showed that U.S. hous­ing starts surged 4.8 per­cent to a sea­son­ally ad­justed an­nual pace of 1.19 mil­lion units, un­der­pin­ning a theme of strength in the U.S. econ­omy.

Fed funds fu­tures rates show in­vestors see around a 40 per­cent chance the Fed will raise rates by its De­cem­ber meet­ing, ac­cord­ing to CME Group's FedWatch tool, com­pared with less than 20 per­cent a few weeks ago.

The dol­lar in­dex, which tracks the green­back against a basket of six ma­jor ri­vals, hit a high of 97.271 .DXY, its high­est level since March 10.

The dol­lar rose 0.1 per­cent against the yen to 106.20 yen JPY=, af­ter hit­ting 106.53 yen on Tues­day, its high­est level since June 24 when mar­kets were shaken by Bri­tain's sur­prise vote to exit the Euro­pean Union.

"The dol­lar is now be­ing sup­ported by ris­ing U.S. rate ex­pec­ta­tions. The like­li­hood of a Fed rate hike be­fore the end of the year that is be­ing priced in by the mar­kets has al­most re­turned to the lev­els seen be­fore the EU ref­er­en­dum," said Thu Lan Nguyen, cur­rency strate­gist at Com­merzbank.

"Most re­cently the ris­ing rate hike ex­pec­ta­tions are mainly due to bet­ter eco­nomic and in­fla­tion de­vel­op­ments in the US."

Spec­u­la­tors have also been un­wind­ing their safe-haven bids in the yen as the ini­tial shocks from the Brexit vote dis­si­pated, and ex­pec­ta­tions rose of ad­di­tional eas­ing from the Bank of Ja­pan at its July 28-29 meet­ing.

A ma­jor­ity of econ­o­mists polled by Reuters ex­pect fur­ther BOJ eas­ing, which is likely to con­sist of a com­bi­na­tion of mea­sures.

Ja­panese pol­i­cy­mak­ers are un­likely to go as far as fund­ing gov­ern­ment spend­ing through di­rect debt mon­e­ti­za­tion, or "he­li­copter money" but might pur­sue a mix of ag­gres­sive fis­cal and mone­tary ex­pan­sion to bat­tle de­fla­tion, ac­cord­ing to sources.

"If the BOJ doesn't take any ac­tion, the dol­lar/yen can fall back to 100 again," said Ka­neo Ogino, di­rec­tor at for­eign ex­change re­search firm Global-info Co in Tokyo. "But now the fo­cus has also shifted to the pos­si­bil­ity of a U.S. in­ter­est hike," he said, which will likely un­der­pin the dol­lar even in the event the BOJ de­cides not to ease this month.

The dol­lar's rise saw the euro EUR= shed 0.3 per­cent to trade at $1.10985, its low­est since June 27. The Euro­pean Cen­tral Bank will hold a reg­u­lar pol­icy meet­ing on Thurs­day, its last be­fore an eight-week sum­mer break.

It is not ex­pected to take any ad­di­tional eas­ing steps but could sound a dovish tone.

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