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Dollar rallies from three-month low on higher rate-increase odds
[SINGAPORE] A gauge of the dollar rebounded from a more than three-month low after two regional Federal Reserve chiefs suggested markets were underestimating the likelihood of increases in US interest rates.
The Bloomberg Dollar Spot Index snapped a three-day slide as the probability the US central bank will boost interest rates by December rose past 50 per cent for the first time since June 23, when the UK voted to leave the European Union.
New York Fed President William Dudley and Atlanta Fed President Dennis Lockhart indicated policy makers could potentially raise rates as soon as next month.
"The dollar is getting support from Dudley's general reference to the market being too complacent about Fed hikes between now and end-2017," said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank Ltd.
"Still, one should be careful and not to read too much into his comments. He only said a September hike is possible, not probable, and that is consistent with the well-worn Fed phrase that every meeting should be considered live."
The Bloomberg Dollar Spot Index, which measures the US currency against 10 peers, rose 0.3 per cent as of 7 am in London, following a three-day 1 per cent slide. The measure reached its lowest level since May 3 on Tuesday.
The dollar gained 0.7 per cent to 101.01 yen and advanced 0.1 per cent to US$1.1265 per euro. It climbed 0.3 per cent to 76.72 US cents against the Australian dollar and was little changed at US$1.3040 versus the pound.
Futures contracts show a 51 per cent likelihood of an increase by December, the highest since June 9. The Federal Open Market Committee left interest rates unchanged when it met last month, but said in a post-meeting statement that "near-term risks to the economic outlook have diminished".
The Fed will publish minutes of that meeting Wednesday at 2 pm in Washington.
The US dollar's gauge is still down 1.3 per cent since the Aug 5 release of US employment data that showed jobs growth was greater than analysts expected. Hedge funds and other large speculators reduced bullish dollar bets in the week to Aug 9 to the least since the period ended July 19.
"While Dudley was at least able to stem the bleeding for the dollar index, price action is not encouraging for the dollar near term," said Sean Callow, a senior foreign-exchange strategist at Westpac Banking Corp in Sydney.
"Still, so long as a rate hike seems more likely than not as the Fed's next move, we wouldn't get super bearish on the dollar."