Wednesday, October 26, 2016

Dollar Underpinned By Fed Rate Expectations, Aussie Shines

Reuters
October 26, 2016

Underpinned by expectations U.S. rates will rise by the year-end, the dollar held steady in Asia trading on Wednesday, just below a near nine-month peak struck overnight, while the Australian dollar gained as inflation data doused chances of a rate cut there.

Consumer prices rebounded by more than forecast last quarter in Australia, while the annual pace of core inflation edged up for the first time in over a year, leading investors to price out almost any chance of a near-term cut in interest rates.

The Reserve Bank of Australia holds its monthly policy meeting next week and is expected to keep rates at a record low 1.5 percent.

The Aussie jumped to $0.7709 AUD=D4 from $0.7645 before the data. It was last up 0.5 percent on the day at $0.7684.

"We've seen Aussie buying against the crosses, so Aussie outperformance is the main theme in the Asian session, with it testing recent highs around that 77-figure area," said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong. "The question, though, is whether it can sustain levels above there."

The dollar index, which tracks the greenback against six major rivals, stood at 98.739 .DXY after rising as high as 99.119 overnight, its highest level since Feb. 1.

The U.S. currency has been bolstered by growing expectations the Fed is on track to raise rates by the year-end. The market was pricing in a greater than 78 percent chance that the Fed would raise rates in December, according to CME Group's FedWatch program, and even a somewhat weak consumer confidence reading did little to dent those expectations.

U.S. data released on Tuesday by the Conference Board showed the consumer confidence index dropped to 98.6 in October from a downwardly revised 103.5 in September.

Given the recent strength of the U.S. currency on a dollar index basis, "it will be interesting to note whether the Fed makes any acknowledgment of the amount of financial tightening that has occurred through dollar strengthening," said Bill Northey, chief investment officer of the private client group at U.S. Bank in Helena, Montana.

The euro EUR= was steady at $1.0890, after slipping to an almost eight-month low of $1.0848 on Tuesday.

Against the yen, the dollar stood at 104.24 JPY=, flat on the day but not far from a roughly three-month high of 104.87 yen touched in overnight U.S. trading.

Sterling, meanwhile, slipped 0.2 percent to $1.2164GBP= after Bank of England Governor Mark Carney cast doubt on expectations for more monetary stimulus in Europe, saying that the BoE would "undoubtedly" take sterling's weakness into account at its rate-setting meeting next week.

Carney's comments helped send the pound to a two-week low of $1.2082.


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