Dollar set for 4th week of gains as markets cut short bets

The dollar rose on Friday and is on track for its fourth consecutive week of gains as investors trimmed some short bets on growing views that interest rate markets are underpricing the extent of US rate increases over the coming months.

Solid US economic data, along with the prospect of US tax cuts and growing expectations of the appointment of a likely hawkish Federal Reserve Chair after Yellen steps down have combined to given a lift to the dollar in recent weeks.

“Some very short positions are being reduced as markets are coming around to the view that the bond markets are not reflecting the likelihood that the Fed may raise interest rates more than what is currently reflected,” said Thu Lan Nguyen, an FX strategist at Commerzbank AG in Frankfurt.

The latest poll of over 60 strategists this week showed the greenback will at best be where it is now in three, six, and 12 months as predictions were largely unchanged, suggesting the current rally will mostly be short-lived.

But some traders believe the current dollar rally may have more room to run especially if the US presses ahead with significant tax reforms in the coming months or if President Donald Trump appoints a hawkish US Federal Reserve chair.

Next US Fed Chair

Oxford Economics assigns a 40 per cent probability to Kevin Warsh as the next US Federal Reserve Chair, a candidate that is increasingly perceived as hawkish by the markets.

But futures markets are giving only a 40 per cent probability to two rate hikes over the next 12 months, a likelihood that may change dramatically and kick US. Treasury yields and the greenback higher if the data improves.

The dollar index, which measures the dollar's value against a basket of six major currencies, edged up 0.2 per cent to 94.097. It rose to 94.112 at one point on Friday, its strongest level since mid-August.

The last time the dollar enjoyed a four week rising streak was back in February-March when expectations of significant US tax reforms were at a fever pitch but the dollar tanked more than 10 per cent in the subsequent months as those expectations faded.

US jobs data

The short-term focus is on US jobs data for September, due later on Friday. The employment data is expected to show a slowdown in jobs growth, reflecting the effects from Hurricane Harvey and Irma.

According to a Reuters survey of economists, the jobs data will likely show that non-farm payrolls increased by 90,000 jobs last month after rising by 156,000 in August.

Elsewhere, sterling fell 0.4 per cent to one-month lows in early trade to $1.3063 as investors worried about the rising political uncertainty.

Divisions over the future of British Prime Minister Theresa May burst into the open on Friday, with allies saying she should carry on and a former Conservative Party chairman claiming the support of 30 lawmakers for a plot to topple her.

COMMENT NOW