Dollar rises toward 16-month high after hawkish Fed guidance

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LONDON/SINGAPORE (Nov 9): The dollar rose towards a 16-month high on Friday after the U.S. Federal Reserve kept interest rates steady and reaffirmed its monetary tightening stance, cueing up investors for a rate hike in December.

The greenback fell sharply, following U.S. midterm elections on Tuesday on expectations the outcome of the vote would make further fiscal stimulus measures unlikely.

But the dollar bounced back and on Friday returned to outperforming most major currencies, underpinned by the robust U.S. economy and rising interest rates.

"We're wary of selling the dollar too soon, because the Fed is still hiking rates into a tightening labour market and trade tensions haven't gone away," said Kit Juckes, chief FX Strategist at Societe Generale.

"The U.S.-Chinese wars of words go on, and the idea that a trade deal is almost done and will be rubber-stamped (at the G20) in Buenos Aires seems very optimistic."

The Fed is widely expected to raise interest rates in December, which would be its fourth hike this year.

Renewed strength in the dollar - which tends to appreciate from trade war tensions by acting as a safe haven — is pushing the Chinese yuan towards 7 per dollar and has seen the euro slip towards US$1.13.

In foreign exchange markets, investor focus is shifting back to the divergence between the monetary policies of the United States and other major economies.

In Japan, where interest rates are seen staying extremely low, the yen is near a five-week low against the dollar and has fallen 2.2% over the last 10 trading sessions.

On Friday, though, the yen reversed course to trade up 0.2% at 111.86.

The dollar index, a gauge of its performance against six major peers, traded at a one-week high at 96.89, not far from a 16-month high of 97.2 brushed on Oct 31.

The euro traded at US$1.1343, losing 0.2% after falling sharply on Thursday.

The European Commission forecast the Italian economy would grow more slowly than Rome thinks in the next two years, leading to much bigger budget deficits than assumed by the government.

A standoff between the EU and Rome over the budget deficit and concerns over the bloc's slowing economic growth have dragged on the euro, which has fallen 4.2% versus the dollar over the last six months.

The pound changed hands at US$1.3015, down 0.4%.

The British currency has benefited recently from growing investor expectations that Britain is close to reaching a deal with the EU, less than five months before it is due to exit the bloc.

The Australian dollar lost 0.2% to trade at US$0.7241. It tends to struggle when sentiment towards China — Australia's largest trade partner — weakens.