Dollar snaps gains as Fed-fuelled rally fizzles

London

THE dollar stepped back from a one-week high on Thursday as investors took profits after a rally this week encouraged by upbeat Fed minutes signalling more rate hikes in store.

A pause in the greenback's rally boosted emerging market currencies led by the Turkish lira and pushed higher-yielding currencies such as the Australian dollar and the New Zealand dollar higher.

The minutes from the Fed's Sept 25-26 meeting showed every Fed policymaker backed raising interest rates and also generally agreed borrowing costs were set to rise further, despite US President Donald Trump's view that tightening has already gone too far.

Goldman Sachs strategists said the minutes confirmed market expectations of a rate increase in December. Two more are expected next year, according to swap markets.

"The minutes underscore the fact that the markets are vastly underestimating the Fed's capacity to tighten," said Win Thin, global head of FX strategy at Brown Brothers Harriman in a note. "At some point, we think markets will start thinking about a fourth hike next year."

Risk appetite was mixed across the board with the Swiss franc and Japanese yen also gaining.

Interest rate futures are now pricing in an 83 per cent likelihood that the Fed raises rates in December, according to CME Group's FedWatch Tool, the fourth hike this year.

Against a basket of its rivals, the dollar gained for a third consecutive day, up 0.2 per cent at 95.78.

A semi-annual report by the US Treasury report released overnight refrained from naming China directly as a currency manipulator though market watchers said Washington will monitor the yuan's moves.

Deutsche Bank strategists termed the report "as a bit of an escalation without being too dramatic".

The Chinese currency traded in the offshore market near a three-month low against the dollar at 6.9385 yuan per dollar.

The euro changed hands at US$1.1519 on Thursday, up 0.2 per cent versus the greenback, after losing 0.65 per cent on Wednesday. The euro has lost less than a per cent versus the dollar so far this month.

The British pound was flat versus the dollar on Thursday to US$1.3110 after Prime Minister Theresa May said London is willing to discuss an extension of the transition period after Britain leaves the European Union. REUTERS