Rebound in US yields helps dollar; euro hits 2-week low

London

THE dollar hit a 31/2 month high against a basket of currencies on Wednesday after a voting member of the US Federal Reserve's policy-setting committee expressed support for an interest rate hike in September.

Atlanta Federal Reserve president Dennis Lockhart's comments brought cheer to dollar bulls, many of whom were having a rethink about whether the Fed would raise rates this year after subdued wages and tepid economic growth in the first quarter that had clouded the policy outlook.

The dollar index was up 0.2 per cent at 98.105, having hit a high of 98.218 in Asian trade, its highest since late April. It also touched a 31/2 month high against the Swiss franc of 0.9805 francs after Swiss data showed the country slipping deeper into deflation and raising pressure on the Swiss National Bank to act next month. The dollar's advances took the euro to a two-week low of US$1.0847, with a rise in short-dated Treasury yields adding to the dollar's allure as rate differentials moved in its favour. "More (dollar) gains are dependant on how payrolls data is on Friday and whether earnings are picking up," said Niels Christensen, FX strategist at Nordea.

Mr Lockhart, a voter this year on the Federal Open Market Committee, told the Wall Street Journal that it would take "significant deterioration" in the US economy for him to not support a rate hike in September.

But with the fed funds rate indicating only a 50 per cent chance of lift-off in September, the odds of a hike then are still seen hinging on Friday's US non-farm payrolls data.

Before that, the ADP employment and ISM non-manufacturing surveys will be in focus to give investors an idea about whether the economy and employment growth is picking up. Robust numbers will make the Fed more comfortable over the prospect of starting to raise interest rates in a gradual manner. "As a further improving labour market should ultimately lead to accelerating price developments, and given medium-term inflation expectations have remained strongly supported of late, we remain of the view that the Fed will start to tighten monetary policy in September," said Manuel Oliveri, FX strategist at Credit Agricole.

Meanwhile, the Australian dollar saw profit-takers chip away at some of the big gains it made on Tuesday after the Reserve Bank of Australia toned down its call for a weaker currency. The Aussie dipped 0.3 per cent to US$0.7355 after surging 1.3 per cent on Tuesday to a two-week high of US$0.7428. REUTERS