Dollar Near Seven-Month High on Bets Fed to Hike in December

(Bloomberg) -- The dollar held near its highest level since March after advancing against all of its developed market peers last month amid increased confidence the Federal Reserve will raise interest rates this year.

The Bloomberg Dollar Spot Index had its best October since 2008, surging 2.2 percent, as the market-based probability of the Fed tightening monetary policy by the end of December climbed to more than 70 percent from under 60 percent at the end of September. Data Monday showed U.S. consumer spending rose in September by the most in three months as incomes grew, backing the case for higher borrowing costs.

“Improving U.S. economic activity and a higher market-based measure of U.S. inflation expectations raised the odds for” a Fed move in December, said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia in Sydney. “Nonetheless, we maintain our view that the dollar will not make new cyclical highs and instead drift slightly lower throughout 2017 because the Fed’s interest rate hikes will remain very gradual.”

Bloomberg’s dollar index, which measures the U.S. currency’s performance against a basket of 10 major counterparts, was little changed at 6:37 a.m. in London. Last Friday, it touched its highest level since March 16.

The U.S. 10-year break-even rate, a measure of the market’s inflation expectations, is holding close to the highest level since July 2015. Citigroup Inc.’s U.S. Economic Surprise Index, while still below zero, has recovered from a four-month low set in October. A negative reading indicates data are falling short of forecasts.

Policy Meetings

The Bank of Japan Tuesday kept its monetary policy stance unchanged even as it trimmed its forecast for inflation for the coming fiscal year to 1.5 percent from 1.7 percent. The vast majority of economists surveyed by Bloomberg News had expected no change in the key policy tools this time, after the central bank reset its monetary program in September following a comprehensive policy review. The yen was little changed against the U.S dollar at 104.78.

“Six weeks after taking the big step to target JGB yields is not the time to make yet another change,”said Sean Callow a senior strategist at Westpac Banking Corp. in Sydney. Extending the likely time to reach the inflation target “is at least admitting reality,” he said.

The Fed concludes its board meeting Wednesday and is also expected to stay on hold. 

“We expect data and Fed communication this week to be generally consistent with the Fed moving towards a December rate hike,” Daniel Katzive, New York-based head of foreign-exchange strategy for North America at BNP Paribas SA, wrote in a note. “With this outcome already about 70 percent priced in by rates markets and a full six week intra-meeting period still ahead we do not expect much further near-term adjustment higher in rate support for the dollar.”

The Australian dollar rose 0.6 percent to 76.55 U.S. cents after the nation’s central bank left interest rates unchanged at a policy meeting Tuesday. Twenty-two of 28 economists surveyed by Bloomberg predicted the monetary authority will keep its benchmark rate on hold with the other six predicting a quarter-point reduction.

To contact the reporters on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net, Lilian Karunungan in Singapore at lkarunungan@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Tomoko Yamazaki, Amit Prakash