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Dollar index at 4-mth high powered by strong US data and Fed hike hopes

Dollar index

The dollar hit a four-month 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 per cent 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 per cent chance the Fed will raise rates by its December meeting, according to CME Group’s FedWatch tool, compared with less than 20 per cent a few weeks ago.

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

The dollar rose 0.1 per cent against the yen to 106.20 yen, after hitting 106.53 yen on Tuesday, its highest level since June 24 when Britain exited the European Union.

Currency strategist at Commerzbank, Thu Lan Nguyen, said, “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”.

“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.

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Paul

The author Paul