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[LONDON] Further signs that the US Federal Reserve is swinging toward a March rise in interest rates kept the US dollar rising against the yen and a handful of other major currencies on Thursday, although the pace against a resilient euro was slower.
Governor Lael Brainard, a dove on the US central bank's open market committee, was the latest to say on Wednesday that an improving global economy and a solid US recovery mean it will be "appropriate soon" to raise rates.
That fuelled a rise of more than half a percent to a two-week high of 114.40 yen and gains of up to one per cent against the Australian and New Zealand dollars, typically sold when investors are reining in their appetite for risk.
The latter moves, and the relatively minimal scale of the gains against the euro and sterling, pointed to a more mixed picture, however, even as expectations of a rise in rates this month double.
The euro has proven strong around US$1.05 and the losses for both European stock markets and the commodities currencies point to worries about the impact of higher US rates and a higher US dollar on global growth.
"The fact that the dollar hasn't managed to rally to any order of magnitude is of concern to dollar bulls," said Richard Benson, co-head of portfolio management with currency fund Millennium Global in London.
"The problem from here is that if you haven't been involved for a period of time, are you going to bet against the euro when it's almost fully-priced for the Fed? The next two percent (move higher for the dollar) may be very sticky."
The dollar index, which measures the greenback against a basket of six major currencies, was just 0.25 per cent higher on the day on Thursday at 102.03.
Against the euro it gained just 0.3 per cent to US$1.0518, with traders citing a steady drip of corporate demand for the single currency, which also fuelled a rise against sterling on Wednesday.
A widening of US-Japan interest rate differentials helped the US dollar, but the US two-year yield fell back a basis point from Asian session highs of 1.308 per cent as traders arrived at their desks in New York.
Some analysts warned that the dollar could weaken, despite the widening interest rate differentials, should stocks retreat.
"If the Fed goes ahead with a faster pace of rate hikes and shrinks its balance sheet, it will weigh on stock prices," said Minori Uchida, chief FX analyst at Bank of Tokyo Mitsubishi UFJ.
"Lower share prices and wider yield differentials would result in a weaker dollar, just like in May 2013 when Fed's Bernanke signalled tapering."
Speeches from Fed chair Janet Yellen and Vice chair Stanley Fischer on Friday are now widely expected to be the final piece of the puzzle, along with next week's non-farm payrolls.
But Millennium's Benson and a number of others point to the need for a bigger move in yields of longer-dated US Treasuries if the greenback is to rise further.
"Whether the Fed's next hike is in March, May or June is less important than whether they go twice or three times this year, and that in turn is less important than what the market prices as a terminal Fed Funds rate," said Societe Generale strategist Kit Juckes.
"At the moment, the market isn't convinced that Fed Funds will peak much above 2 per cent. A move higher from there would be more supportive for the dollar than any rethink about how fast we get to 2 per cent."
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