Euro up, dollar drifts after rate hike speculation

THE euro firmed to one-month highs against the dollar in Asian trading yesterday after some European Central Bank (ECB) policymakers raised the possibility of hiking interest rates before bond purchases end.

The euro was up 0.2%, at $1.0699, after rising as high as $1.0701, its highest level since February 9.

Some members of the ECB’s governing council discussed the possibility of higher interest rates at last week’s policy meeting, but talk on the issue was brief and did not receive broad support, two sources familiar with the discussion said.

The euro’s gains were limited by expectations that the US Federal Reserve would decide to raise interest rates at its two-day policy meeting that ends tomorrow, after US employers hired workers at a robust pace in February.

The headline figure surpassed expectations, and wages also rose, although by less than some economists expected. Overall, the non-farm payrolls report reinforced market expectations that the Fed will hike interest rates this week despite slowing economic growth.

Wage growth rose 0.2%, falling short of an expected 0.3% increase, which caused US Treasury yields to recede from last week’s 12-week highs.

The benchmark 10-year US yield was last at 2.58% in Asian trading, compared with its US close on Friday of 2.582%. It was well below Friday’s high of 2.624%, which was its highest since December.

Fed fund futures prices showed investors pricing in more than a 90% chance of an increase in US overnight interest rates, according to CME Group’s FedWatch tool.

With a rate increase so broadly priced into market expectations, investors have moved on to the next question of whether the Fed will be able to sustain its pace of hikes and also increase rates in its June and September meetings.

“Everyone wants to see the economic projections of Federal open market committee members, to gauge whether they will indeed stick to a path of raising interest rates in both June and September,” Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank in Tokyo, said.

A Reuters poll of 23 primary dealers showed a dozen of them expected the Fed to raise rates to 1% to 1.25% by its June meeting, while 10 of them expected a rate increase by its September meeting.

As market participants ponder the outlook for future monetary policy moves, dayto-day trading this year has vexed some investors. “It’s hard to pick one specific theme in a market like this,” Bart Wakabayashi, the branch manager for State Street Bank and Trust in Tokyo, said. “It’s hard to find trends, so I think people are mostly just playing ranges, technicals and momentum,” he said.

The dollar edged down 0.2% against its Japanese counterpart to 114.66 yen, below Friday’s high of 115.50 yen, which was the highest since January 19.

Speculators had boosted bullish bets on the dollar last week, lifting net longs to their highest level since early February, according to Commodity Futures Trading Commission data released on Friday and calculations by Reuters.

The dollar index slipped 0.1% to 101.13, its lowest since February 28.

Sterling added 0.2% to $1.2189, moving away from last week’s eight-week lows.

The pound lost almost 1% against the euro on Friday after the ECB news. The single currency was last up 0.1% at 87.83 pence after rising as high as 87.86p, its loftiest peak since January 17.