US dollar strengthens as bulls wager Fed rate increase is in sight

[NEW YORK] The US dollar climbed as traders showed a growing conviction that the Federal Reserve is poised to raise interest rates by year-end.

The greenback rose against most Group of 10 countries on Monday as futures prices signalled a slightly increased probability of a rate hike by December, at 68 per cent. Traders anticipate minutes of the Fed's September meeting due Oct 12 will provide clues on how close policy makers are to deeming US economic growth and inflation strong enough to merit tighter monetary policy.

Forecasters predict the US dollar has a good chance of strengthening through year-end after last week posting its longest winning run versus the yen since July 2014. Hedge funds' net positions that profit from a stronger greenback reached the highest level since February in the week through Oct 4. US dollar traders will parse Fed chair Janet Yellen's speech in Boston on Oct 14 for the central bank's views on the economy.

"The data keeps the Fed on track for a December move, but that's not a slam-dunk decision at this point," said Ned Rumpeltin, European head of currency strategy at Toronto-Dominion Bank in London.

The US dollar gained 0.1 per cent to 103.68 yen as of 7:55am in Tokyo on Tuesday, after climbing 0.6 per cent in New York. The greenback fell 0.9 per cent on Oct 7, snapping eight days of gains. The US currency was little changed at US$1.1140 per euro.

Monday's recovery came amid limited trading flows, with markets closed for holidays in Japan and Treasuries dealing halted for the US's Columbus Day. The Oct 7 drop in the US dollar-yen rate was spurred by demand for the Japanese currency as a haven after a flash crash in the pound.

"In the short term, the US dollar can do OK - it should be well supported through the week," said Chris Turner, London-based head of currency strategy at ING Groep NV.

"We're forecasting modest tightening." ING expects the Fed will raise interest rates in March 2017.

BLOOMBERG