US dollar extends longest winning streak against yen since August

[TORONTO] The US dollar extended gains against the yen to the longest streak since August as a report showed US manufacturing expanded in September after unexpectedly shrinking a month earlier.

The improvement in factory output helped boost bets for a Federal Reserve interest-rate increase by December to 60 per cent, according to futures prices compiled by Bloomberg. Later this week, a jobs report is forecast to show a pickup in the pace of hiring, economists surveyed by Bloomberg predict, yet it would require a "significant surprise" to move the market substantially, according to John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Denmark.

"Positive US data helps the US dollar higher," said Mr Hardy, who expects the greenback to rise to 105 per yen by the end of the year. "The hurdle is high for the US data to be meaningful this week. The market feels very unsure of itself after the Bank of Japan and Fed meetings failed to spark a bigger move."

The US currency has fallen almost 4 per cent this year as traders anticipate the central bank will be slow to raise rates amid uneven economic data. Yet the Fed indicated this month it remains data-dependent and is pleased with the progress of the economy.

The US dollar rose 0.3 per cent to 101.65 yen at 5pm in New York, extending its five-day rally to 1.2 per cent. Swings in the US currency versus the yen remain low, with the three-month implied volatility falling to an eight-week low.

The Institute for Supply Management's index advanced to 51.5 from August's 49.4 reading that marked the first contraction in six months, figures from the Tempe, Arizona-based group showed Monday.

A manufacturing purchasing managers' index for the US fell to 51.5 in September from 52 in August, yet beat expectations for 51.4 in a Bloomberg survey. Readings above 50 signal growth.

Fed Bank of New York president William Dudley suggested the central bank should be cautious in raising interest rates, given limits on its ability to respond to a recession with borrowing costs close to zero.

Fed Bank of Cleveland President Loretta Mester said the economy is ripe for an interest-rate increase and repeated that the Fed's November meeting should be viewed as "live" for a policy decision, despite its proximity to the US presidential election.

The likelihood the Fed will raise its key rate by year-end is up from 51 per cent a week ago, according to data based on futures prices compiled by Bloomberg. The calculation is based on the assumption the Fed's target trades at the middle of the new band after the central bank's next boost.

BLOOMBERG