US dollar remains strong on rate hike expectations

The US dollar index traded close to its highest since early February following a speech on Friday by a key Fed official that increased the probability of a rate hike before the end of the year.

San Francisco Fed President John Williams also backed the possibility of a rate hike this year, following similar comments by the New York Fed President William Dudley earlier last week. Williams expressed the view that the economy was running at full employment and that inflation was close to the Fed’s target and that it would “make sense” to gradually raise rates. The comments by Williams showed that most committee members were gradually positioning themselves in favor of a rate hike, despite some misgivings by Chair Janet Yellen. In addition, the prospect that Hillary Clinton would win the US Presidential election in 2 weeks’ time was also seen as a dollar-positive, as such an outcome would entail less uncertainty than the victory of Donald Trump.

The euro revisited Friday’s low of 1.0858 in Monday’s Asian trading, as traders pointed to the ECB’s bias towards extending the current asset purchase program beyond May of 2017. The euro was last trading at 1.0880. Against the yen, the dollar climbed to 103.99 but failed to break through the 104 level. The dollar made a similar attempt during Friday. The pound was holding the 1.22 mark against the US dollar and euro / pound was trading around 0.89. The aussie managed to record gains versus the greenback as it rose above 76 cents to 0.7630.

In economic news, data out of Japan was relatively positive as exports fell less-than-expected during September, resulting in a larger-than-forecast trade balance. There was also an improvement in Markit October Manufacturing flash PMI to 51.7 relative to 50.4 the previous month. There was little movement in yen crosses as a result of the numbers.

Oil was faced with some selling following statements out of Iraq that the country wanted to be excluded from any deal by OPEC to cut output. Still, oil held above the $50 mark at $50.64 per barrel.

Looking ahead to the remainder of the day, October’s Markit Flash PMI numbers for the Eurozone will be closely watched for signs of how services and manufacturing are doing in the single currency area. There will also be data out of the UK in the form of CBI trends / orders for October and Markit Manufacturing Flash PMI out of the United States. Regional Fed Presidents Bullard and Evans will also give speeches later in the day.