US dollar rises for third day ahead of expected hike

London

THE US DOLLAR edged higher for a third day before a widely expected US interest rate hike next week, but its gains were limited by growing expectations that the Federal Reserve may express a more cautious view on future rate rises.

The US dollar has gained nearly 6 per cent against a basket of currencies this year on the back of Fed rate increases, but a recent softening of US Treasury yields and tepid data has led some to forecast a peak for the US dollar.

"We think the Fed may be inching closer to a wait-and-watch mode on the outlook for monetary policy," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

"Even in recent episodes of market selloffs, the dollar hasn't been gaining as much, indicating investors are cautious about pushing the greenback higher."

On Wednesday, the US dollar was a touch higher at 97.40 but moves were tiny in range-bound markets. The euro rose 0.1 per cent to US$1.1334.

Gauges of risk appetite such as the Australian dollar and the euro/Swiss franc were little changed.

Market expectations for Fed rate increases in the money markets were barely for one more rate hike next year, even though some banks such as JP Morgan expect the Fed to raise interest rates as much as four times in 2019.

John Normand, head of cross-asset fundamental strategy at JP Morgan, said short position on bonds are still prevalent, in contrast to the long positions that should be held late-cycle if the economy is expected to slow materially and the Fed set to pause.

US inflation data is the highlight of the day with headline inflation forecast at 2.2 per cent, accelerating slightly from 2.1 per cent.

Sterling was the biggest gainer, rising 0.4 per cent in volatile trade at US$1.2535, after Prime Minister Theresa May vowed to fight a challenge to her leadership and warned rebels within her party that they risked delaying or even stopping Britain's departure from the European Union.

The Australian dollar, a gauge of broader risk sentiment, was up 0.2 per cent at US$0.7217. The 10-year Treasury note yield inched up to 2.886 per cent, continuing to pull back from recent lows.

The yield had dropped to a three-month low of 2.825 per cent at the start of the week, with dovish comments from Fed officials and soft US data further reinforcing views of a slowdown in the tightening cycle. REUTERS