Tuesday, September 9, 2014

Dollar to test new highs?

By David Goodman and Andrea Wong

The dollar touched the strongest in almost six years versus the yen as Treasury yields climbed on speculation U.S. economic reports this week will back the case for the Federal Reserve to boost interest rates next year.

An index of the greenback (NYBOT:DXZ14) advanced to a 14-month high after a Fed Bank of San Francisco report said yesterday markets may be underestimating the pace of rate increases. The pound (CME:B6Z14) rose from an almost 10-month low after Bank of England Governor Mark Carney said officials may increase their main rate in the spring. China’s yuan (CME:QTZ14) climbed to a six-month high as the central bank raised its fixing by the most in almost four years.

“A lot of focus was on the San Francisco Fed papers out yesterday—big moves on the bond market, and that definitely helps the dollar,” Brad Bechtel, managing director of Faros Trading LLC in Stamford, Connecticut, said in a phone interview. “That pressured euro lower, dollar-yen higher.”

The dollar rose as much as 0.3% to 106.39 yen (CME:J6Z14), the strongest since October 2008, before trading at 106.24 at 9:34 a.m. New York time, up 0.2%. The U.S. currency was little changed at $1.2887 per euro after appreciating to $1.2860, the strongest since July 2013. The euro gained 0.1% to 136.90 yen.

The Bloomberg Dollar Spot Index, which tracks the greenback against a basket of 10 major currencies, rose 0.3% to 1,048.06 and reached 1,048.69, the highest level since July 2013.

Fed Report

Low volatility across financial markets may reflect investors’ “relative certainty” about interest rates, San Francisco Fed researchers wrote. Investors may be less uncertain about their projections than Fed policy makers are about theirs, they wrote.

There’s a 60% chance the Fed will raise its benchmark interest-rate target to at least 0.5% by July 2015, futures trading shows. The likelihood was 52% at the end of August.

The Fed, which meets Sept. 16-17, is considering when to raise interest rates for the first time since 2006. It has held the key interest-rate target in a range of zero to 0.25% since 2008 to support the economy. Policy makers also are on track to end a bond-buying program in October.

U.S. initial jobless claims fell 2,000 to 300,000 last week, according to a Bloomberg News survey before the data on Sept. 11. Retail sales gained 0.6% in August from the previous month, when they stalled, a separate survey showed before the figures are published on Sept. 12.

‘New Highs’

“The dollar is likely to test new highs against the yen ahead of the Fed meeting next week,” said Kengo Suzuki, chief currency strategist at Mizuho Securities Co. in Tokyo. “The dollar broke out of the range as investors gained confidence in the U.S. economy and as the Fed deepens the debate about the policy after tapering ends.” The greenback may advance to 110 yen this year, he said.

The dollar jumped 4.1% in the past three months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen was little changed and the euro weakened 1.9%.

Treasury 10-year yields reached 2.51% today, the highest since Aug. 5, burnishing the appeal of U.S. dollar- denominated assets.

“It’s very supportive for the dollar that Treasury yields are now heading higher,” said Michael Sneyd, a foreign-exchange strategist at BNP Paribas SA in London. “When we had good data before, geopolitical risks kept yields down. Now that they are rising, the stars are aligning for the dollar.”

BNP forecast the dollar will climb to 110 yen by year-end, Sneyd said.

Carney Outlook

The pound jumped after Carney spoke at a conference in Liverpool.

“If interest rates were to follow the path expected by markets; that is, beginning to increase by the spring and thereafter rising very gradually” inflation would reach the 2% target and 1.2 million jobs would have been created, Carney said. “In other words, we would achieve our mandate.”

The U.K. currency gained as much as 0.3% to $1.6157 before trading little changed at $1.6094. It fell earlier to $1.6065, the lowest since November, after a poll of Scottish voters provided fresh evidence of a swing away from the U.K. and suggested the result of next week’s referendum on independence is on a knife edge.

The yuan strengthened as the People’s Bank of China boosted the currency’s daily reference rate by 0.3% to 6.1520 per dollar, the biggest increase since November 2010 and the strongest level in four weeks.

China’s trade surplus climbed to an all-time high in August, the Beijing-based customs administration said yesterday. Exports exceeded imports by $49.84 billion, beating the previous record of $47.30 billion set in July.

The yuan gained 0.1% from Sept. 5 to 6.1370 per dollar after appreciating to 6.1317, the strongest since March. China’s financial markets were shut yesterday for a holiday.

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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