Rates speculation sends dollar on best run in 17 years

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LONDON/SYDNEY/SINGAPORE (Sept 12): The dollar was on track for its longest winning streak in 17 years on Friday, hitting multi-month highs against its Australian and Canadian counterparts, as investors bet the U.S. Federal Reserve would raise interest rates in 2015.

The dollar index, which measures the greenback against a basket of major currencies, has notched up nine successive weeks of gains, as strong U.S. economic data has added fuel to rate hike speculation.

Investors will be closely watching next week's meeting of the rate-setting Federal Open Market Committee (FOMC) for any clues on the timing of what would be the first U.S. interest rate increase since 2006.

The recent strong run of U.S. data has led Fed Chair Janet Yellen and other top officials to acknowledge the possibility they may need to raise rates sooner than they thought just a few months ago.

"Over the past few months it's been higher expectations for growth in the second half of 2014 and what this will mean for the Fed that's been driving the dollar," said Josh O'Byrne, a currency strategist at Citi in London.

"Since the beginning of the week markets have been speculating that the Fed is going to be more hawkish at its meeting next week."

U.S. Treasury yields have been adjusting to that prospect with the two-year yield now not far from a three-year peak of 0.5900 percent set in July.

The benchmark U.S. 10-year Treasury yield edged higher on Friday to touch a one-month high of 2.57 percent.

The dollar hit a fresh six-year high against Japan's currency of 197.39, adding to a more than 2 percent gain this week - its biggest weekly gain in almost three months.

The euro also hit a two-month high versus the yen, rising to 138.79 yen on trading platform EBS.

The day's main data is U.S. retail sales, due at 1230 GMT.

Scotland in the balance

Sterling hit a day's low of $1.6205 and 79.81 pence per euro after yet another poll showed the outcome of the Scottish vote on independence in less than a week's time was too close to call.

The currency had hit a one-week high of $1.6277 in Asian trade after a different poll showed those who intended to vote "No" to Scottish independence in next Thursday's referendum had clawed back a narrow lead over secessionists.

The pound had been trading around $1.6235 before the latest poll's release and recovered a little after it to trade at $1.6227, down 0.2 percent on the day.

Citi's O'Byrne said the dollar's broad strength had been overemphasising the pound's recent falls. The trade-weighted sterling index was at 87.1, where it closed before a weekend poll showing the pro-independence camp in the lead sent the pound on its biggest daily fall in 2-1/2 years.

The cost of hedging against short-term swings in sterling versus the dollar rose to a four-year high of 15.5 percent.

The rise in U.S. yields and a pick-up in implied volatility across the market have taken a toll on higher-yielding, but higher-risk, carry currencies in both the emerging and developed world markets.

The Aussie hit a fresh six-month low of $0.9043 on Friday and last traded at $0.9054, down 0.5 percent on the day.

"If we see a hawkish Fed next week, we'll be heading back to 90 cents in no time," said Annette Beacher, head of Asia-Pacific Research at TDSecurities.

The greenback hit a five-month high against its Canadian counterpart of C$1.1038 per dollar, while New Zealand's dollar touched a seven-month low of $0.8157.

The euro edged down to $1.2932, holding above a 14-month trough of $1.2859 set on Tuesday after the European Central Bank announced new easing measures last week.

The Swedish crown edged down ahead of a general election in Sweden on Sunday, the results of which are unclear.