US dollar jumps as rising September Fed-hike odds burn rand to real

[NEW YORK] The US dollar climbed for a third day while emerging market currencies from South Africa to Brazil to Mexico plunged as traders boosted bets on an interest-rate increase from the Federal Reserve later this month.

A gauge of the greenback jumped after Fed Bank of Boston President Eric Rosengren warned that waiting too long to raise interest rates threatened to overheat the US economy and could risk financial stability.

High-yielding currencies including the Australian dollar and Norway's krone also tumbled as commodity prices halted a four-day rally.

"Carry currencies were strong against the US dollar as Fed policy seemed to be very much benign," said Mazen Issa, a senior foreign-exchange strategist at Toronto-Dominion Bank in New York, referring to the strategy of borrowing in low-interest-rate currencies and buying those offering higher yields.

"It's the market recognising that there have been a litany of Fed speakers providing a reminder that there's a chance a hike is still in the cards."

The US dollar has almost erased its weekly loss as traders increased the probability that US policy makers will boost borrowing costs as early as this month. Demand for higher-yielding currencies ebbed as European Central Bank policy makers didn't discuss extension of their bond-purchase plan at their Sept 7 meeting, fuelling speculation central banks start to question the benefits of further monetary easing to bolster economic growth.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, rose 0.5 per cent as of 5pm in New York. The US currency gained 0.2 per cent to US$1.1233 per euro and was up 0.2 per cent to 102.69 yen.

The greenback gained more than 1 per cent versus the rand, the real and the Aussie. An index of 20 emerging-market currencies fell for a second day after reaching the highest level since Aug. 19.

A carry-trade strategy buying four highest-yielding currencies, including the real and rand, against four lowest-yielding ones, such as the euro and yen, lost about 0.6 per cent Friday, cutting its gain this year to 6.2 per cent, according to data compiled by Bloomberg. The same strategy lost 8.5 per cent last year.

Futures pricing indicated about a 30 per cent chance of tighter policy this month, according to data compiled by Bloomberg. The probability of a move by year-end was 58 per cent. The calculations assume the effective fed funds rate will average 0.625 per cent after the central bank's next boost.

"Rosengren, usually in the dovish spectrum of the committee, delivered a more hawkish-than-expected speech, which is pushing the US dollar up," said Andres Jaime, a foreign-exchange and rates strategist at Barclays Plc in New York.

"September should be a live meeting and the Fed probably wants the market to price at least one hike before year-end," he said.

BLOOMBERG