Dollar steady near nine-month high, underpinned by Fed rate outlook

By Hideyuki Sano

TOKYO (Reuters) - The dollar held near nine-month highs against a basket of major currencies on Tuesday as solid U.S. manufacturing activity and comments from a Federal Reserve official cemented expectations of a U.S. rate hike by year-end.

The dollar's index against a basket of six major currencies (DXY) <=USD> traded at 98.768. The dollar index had hit a high of 98.846 on Monday, having risen 3.6 percent so far this month.

"Strong U.S. manufacturing data boosted U.S. bond yields and supported the dollar," said Shinichiro Kadota, senior strategist at Barclays (LON:BARC) Securities.

Preliminary Markit survey on Monday showed U.S. manufacturing activity levels reached a one-year high this month.

Adding to the positive backdrop for the dollar, Chicago Fed President Charles Evans said on Monday the Fed could raise rates three times between now and the end of 2017, so long as inflation expectations and the labour market continue to improve.

Evans' comments built on remarks by San Francisco Fed President John Williams on Friday and New York Fed President William Dudley on Oct. 19, both of whom hinted at a looming rate increase.

As the dollar held firm, the euro eased 0.1 percent to $1.0876 , languishing near its seven-month low of $1.0859 touched on Friday.

The euro has come under renewed pressure after the European Central Bank last week kept the door open to more stimulus in December and doused speculation that it would taper its asset buying programme.

"On the euro, now that it has decisively fallen below $1.10, we expect it to trade lower towards our eventual target of $1.05," said Heng Koon How, senior FX investment strategist for Credit Suisse (SIX:CSGN) in Singapore.

The dollar also had an edge against the yen, rising 0.3 percent to 104.48 yen , just below a 2-1/2-month high of 104.635 yen set earlier this month.

The dollar/yen's implied volatility fell sharply in the last few sessions to seven-month lows as more market players expect the currency pair to get stuck in a narrow trading range.

The one-month volatility fell to 9.0 percent from around 11 percent just a week ago while the three-month volatility fell to 9.7 percent from above 11 percent.

Elsewhere, the Canadian dollar traded at C$1.3339, recovering from seven-month low of C$1.3398 touched on Monday.

Bank of Canada Governor Stephen Poloz said on Monday that a further easing from the Bank of Canada would bring the central bank closer to unconventional monetary policy and the decision on whether to cut rates again is not one to take lightly.