Dollar gains as Fed rate talk back in focus after Grexit avoided

[NEW YORK] The dollar rose as the prospect of an end to Greece's turmoil prompted investors to shift focus to testimony this week from Federal Reserve Chair Janet Yellen as she prepares to raise interest rates later this year.

The greenback strengthened against all 10 of its developed major peers, while a gauge of the dollar remained higher after closing at the strongest in more than a month on Monday as Greece reached an agreement with its creditors. The US currency was set to gain for a fourth day against the yen as the Bank of Japan begins a two-day policy meeting on Tuesday which is likely to emphasise the divergence between the two economies.

"Expectations of a Fed rate hike have propelled dollar buying this far," said Naohiro Nomoto, an associate for currency trading at Bank of Tokyo-Mitsubishi UFJ Ltd in New York. "Market players, expecting the Greek issue to drag on, are ignoring Greece and returning to dollar buying amid data and congressional testimony by Yellen this week." The Bloomberg Dollar Spot Index, which tracks the US currency against its 10 major peers, gained 0.1 per cent to 1,197.74 at 9:13 am in Tokyo from 1,196.51 in New York, the highest close since June 1. The greenback advanced 0.1 per cent to 123.59 yen. The euro slid 0.2 per cent to US$1.0984 after tumbling 1.4 per cent on Monday.

The dollar has surged 21 per cent in the past year, the best performance among the 10-developed-nation currencies tracked by Bloomberg Correlation-Weighed Currency Indices. The euro fell 4.6 per cent.

Greek Surrender Greek Prime Minister Alexis Tsipras on Monday surrendered to European demands for immediate action to qualify for as much as 86 billion euros (S$129 billion) of aid needed to keep his country in the currency union. He has until Wednesday to pass into law key creditor demands. The agreement still needs the approval of several national parliaments, including Greece's.

"One important side-effect of diminished Greece concerns Monday has been the recovery in Fed rate hike expectations," BNP Paribas SA strategists including Daniel Katzive wrote in a note dated July 14. "A firm run of US data this week could see expectations pulled a bit further forward to the benefit of the USD." US retail sales rose for a fifth month this year in June, according to a Bloomberg economist survey before the release of data Tuesday.

Ms Yellen said last week that she expects it "will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalising monetary policy." In contrast, the European Central Bank, which meets July 16, has said it will maintain its unprecedented stimulus at least until September next year to fight off deflationary risks in the euro area and bolster growth.

BLOOMBERG