US dollar stages longest rally since March versus yen on Fed wagers

[TORONTO] The US dollar posted its longest rally since March against the yen as US service companies expanded in September at the fastest rate in almost a year, leading traders to ramp up bets that the Federal Reserve will raise interest rates in coming months.

The greenback advanced for the seventh straight day against Japan's currency as the sign of strength in the world's biggest economy followed comments from Fed officials that revived speculation the central bank is getting closer to tightening policy.

Chicago Fed President Charles Evans said Wednesday that one rate increase by year-end is likely if data continue to improve, while Richmond Fed President Jeffrey Lacker said he saw a case for raising rates.

The US dollar has pared this year's loss against major peers to 3.4 per cent amid mounting wagers that the Fed will hike rates while other major central banks extend unprecedented stimulus.

The US central bank lifted its overnight target from near zero in the final quarter of 2015.

"Market expectations for a Fed move in December are well priced, so Fedspeak is constructive enough to maintain that," said Mazen Issa, a senior foreign-exchange strategist at Toronto-Dominion Bank in New York. "So far, the data is also validating that view as well."

The greenback gained 0.6 per cent to 103.50 yen as of 5pm in New York, reaching the strongest in about a month. The Bloomberg Dollar Spot Index, which measures the currency against 10 major peers, was little changed after touching the highest since Sept. 21.

The market-implied probability of a hike by December rose to 64 per cent, from 51 per cent at the start of last week, futures data compiled by Bloomberg show. Key jobs numbers at the end of this week are forecast to show a pickup in hiring in the world's largest economy.

"The US dollar remains supported by expectations of a Fed rate hike," said Viraj Patel, a London-based foreign-exchange strategist at ING Groep NV. "Fed talk has been relentlessly hawkish in the past couple of weeks, so much so it's been hard for markets to ignore."

Mr Evans, who's not a voting member on the Federal Open Market Committee until next year, said the central bank may raise the benchmark rate as soon as next month. Mr Lacker, who is also a non-voter this year, said "there is a strong case to raise rates more rapidly," repeating what he had said earlier this week.

The Institute for Supply Management's non-manufacturing index jumped to 57.1, the highest since October 2015. The August reading of 51.4 was the lowest in more than six years.

With futures signalling a consensus that Fed officials are unlikely to act at their November's meeting, some analysts saw plenty of time for economic reports to sway expectations before the following policy decision, on Dec 14.

"This is very good news that would be a big deal if there was a truly live FOMC within two weeks," said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal. "As it stands, it's not that big of a deal with the next live FOMC still 70 days out."

The day's economic data helped boost the extra yield that investors demand to own two-year Treasuries rather than similar-maturity German bunds to about 1.5 percentage points, the highest since 2006.

The yield pickup may lure investors to purchase US dollars. From about US$1.12 per euro Wednesday, the greenback is projected to strengthen to US$1.10 by year-end, according to the median forecast in a Bloomberg survey.

"Over time, the wider spread is good for the dollar," said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co.

BLOOMBERG