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Tuesday, May 7, 2024

Dollar gaining on higher US rates

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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 US consumer spending rose in September by the most in three months as incomes grew, backing the case for higher borrowing costs.

“Improving US economic activity and a higher market-based measure of US 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 US 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 US 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 US 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.

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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 US 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.

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