Dollar rallies on jobs stats, likely Fed rate hike

New York

THE US dollar climbed last week as robust employment gains fuelled speculation that the Federal Reserve will increase interest rates this year while its global counterparts add to monetary stimulus.

While policy makers in Europe and Japan buy bonds to stimulate growth and inflation, futures prices show increased chances of the Fed boosting borrowing costs as early as June, adding to the allure of the US currency.

The greenback advanced against the yen by the most in nine weeks as US jobs gains in January capped the biggest three-month gain in 17 years.

"The dollar strength will simply amplify by mid-year," bolstered by a stronger economy, diverging central-bank policies and inflationary pressures, said Jennifer Vail, head of fixed- income research at US Bank Wealth Management, which manages US$122 billion in assets.

The US currency gained 1.4 per cent to 119.12 yen in the week in New York. It was little changed versus the euro at US$1.1316.

Hedge funds and other large speculators increased net positions that profit from a gain in the dollar against euro to the most since June 2012, according to data as at Feb 3 from the US Commodity Futures Trading Commission.

Federal fund futures give a 27 per cent chance that the central bank will lift rates at its policy meeting in June, according to Bloomberg data. That's up from 18 per cent on Thursday. The central bank has held rates at virtually zero since December 2008 to support the economy.

"It puts the Fed rates in contrast with the expectations of the European Central Bank, the banks of Japan and China that are trying to stimulate growth and fight against deflation," Alfonso Esparza, senior currency analyst at Oanda Corp., said by phone from Toronto. "It's a very clear case of rate divergence."

The euro slid for a seventh month in January after the European Central Bank announced a 1.1 trillion-euro (US$1.3 trillion) stimulus plan. The Bank of Japan buys as much as 12 trillion yen (US$100 billion) a month.

The euro will probably stay in the US$1.10 to US$1.15 range while Greece and the ECB negotiate the nation's debt arrangements, Douglas Borthwick, the head of foreign exchange at New York brokerage Chapdelaine & Co, said. BLOOMBERG