Dollar Holds Near Seven-Month High on Policy Divergence Outlook

(Bloomberg) -- The dollar was close to its highest level since March amid bets the Federal Reserve will raise interest rates this year while other major central banks maintain monetary easing.

The greenback has risen against all of its Group-of-10 counterparts this month as the market-based odds of a U.S. hike by December climbed more than 10 percentage points to 71 percent. A gauge of the currency completed a three-day gain Monday after Chicago Fed President Charles Evans said it may be appropriate for policy makers to raise rates three times by the end of 2017 and a U.S. manufacturing gauge rose to the highest in a year.

“There aren’t many senior Fed officials who have come out with specific numbers of expected rate increases,” said Kyosuke Suzuki, head of foreign exchange and money market sales at Societe Generale SA in Tokyo. “That’s providing a tailwind for the dollar.”

The Bloomberg Dollar Spot Index, which measures the U.S. currency’s performance against a basket of 10 major counterparts, was little changed as of 6:38 a.m. in London from Monday’s close, which was the highest since March 15.

The greenback climbed 0.2 percent to 104.42 yen, after reaching 104.48, the highest level since Oct. 14. The Bank of Japan will next decide policy on Nov. 1. Governor Haruhiko Kuroda said Friday that he didn’t see an immediate need to reduce the central bank’s asset purchases as it shifts its focus from expanding the monetary base to targeting interest rates.

Reduced Volatility

One-month implied volatility for the dollar versus the yen fell Monday to its lowest since March before the U.S. central bank sets policy on Nov. 2. Evans said Monday that when the bank next raises rates it should be more explicit about how policy makers will respond to new information about the economy going forward. He will vote on the Federal Open Market Committee next year.

“The trend for the greenback’s robustness remains unchanged,” said Keisuke Hino, a foreign-exchange trader at Mizuho Bank Ltd. in New York. “Currencies are tracking yields, and the dollar is underpinned by rising U.S. yields on the Fed’s rate-hike speculation. That is helping gradually elevate the dollar’s downside against the yen.”

Canada’s dollar slid after central bank Governor Stephen Poloz clarified earlier remarks that had spurred speculation monetary policy would stay on hold. The loonie dropped 0.4 percent to C$1.3332 per greenback after gaining 0.4 percent in the previous session.

Speaking to lawmakers in Ottawa, the BOC’s Poloz said any decision to cut rates further is complicated by the two-track nature of the recovery and the fact the country would be nearer to unconventional monetary tools. He said that “our best plan right now, we think, is to wait for the next 18 months or so,” comments that lifted the loonie from a seven-month low set earlier on Monday. In an e-mailed statement following the testimony, Poloz said the comments weren’t a reference to monetary policy.

--With assistance from Mika Otsuka To contact the reporters on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net, Netty Ismail in Singapore at nismail3@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Jonathan Annells, Tomoko Yamazaki