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Dollar cements gains on growing rate gap bets

London

THE dollar consolidated recent gains and held below a near one-month high on Monday as higher US Treasury yields boosted appeal for the greenback while the euro struggled to stay above 1.16 levels on the Italian budget concerns.

"Relative interest rate differential story is back and that is helping the dollar with US 10-year yields comfortably above the 3 per cent levels and the Fed likely to raise interest rates again in December," said Alvin Tan, a currency strategist at Societe Generale in London.

The dollar index was broadly steady at 95.13 and just holding below a Sept 10 high of 95.38 hit in the previous session.

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While trade concerns have played a major role in the dollar's 3.2 per cent rise so far this year, an increasingly confident US Federal Reserve has also helped the greenback.

Elsewhere, the Canadian dollar rallied half a per cent against the US dollar on Monday as investors rushed to buy riskier assets after the US and Canada agreed to update the North American Free Trade Agreement.

Though other major currencies have recovered some ground against the dollar in recent weeks, JP Morgan strategists said the greenback's gains against many high beta emerging market currencies will continue to support the dollar.

Latest weekly positioning data showed that dollar long positions rose in the week ended Sept 28 to a net long position of US$24.8 billion, its biggest since January 2017 as strong US data and higher Treasury yields attracted hedge funds.

That marks a remarkable turnaround for the dollar this year when short positions in the greenback peaked at nearly US$29 billion in April.

"Appetite for risk-taking is a bit firmer today in the backdrop of the trade deal, though the spotlight will be firmly on US jobs data on Friday, which will indicate whether wage growth has picked up," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

Apart from US jobs data on Friday, PMI data will also be closely watched.

However, the euro struggled to gain much traction as concerns about the Italian budget dogged sentiment. The single currency was broadly flat around the US$1.1608 levels.

Italian daily La Repubblica reported on Monday that the European Commission was set to reject Italy's plans to lift its budget deficit to 2.4 per cent of gross domestic product (GDP) in 2019 and open a procedure against its public accounts in February. The proposed deficit is three times the previous administration's target.

Sterling was broadly flat as a ruling Conservative Party Conference got underway over the weekend and British finance minister Philip Hammond said the European Union was in the mood to do a divorce deal. REUTERS