By Patrick Graham
LONDON (Reuters) - The dollar was on course for its third consecutive week of gains against the basket of currencies used to measure its broader strength on Friday, driven by hardening expectations of a rise in interest rates in December.
In a year where investors have never really got close to fully pricing in a move, short-term U.S. rates now put a 75 percent probability on the Federal Reserve raising official borrowing costs for only the second time in more than a decade.
After a blip in the first half of this week, comments by New York Fed President William Dudley and Donald Trump's failure to register a big win in Wednesday's presidential debate has hardened that view, fueling another surge for the greenback.
European Central Bank chief Mario Draghi's quashing of speculation it was already considering how to wind down bond purchases when the time comes also cooled any signs of recovery for the euro.
"The dollar rally appears to be back on after it struggled at the start of this week," said Kathleen Brooks, research director at City Index in London.
By 0700 GMT, the dollar index (DXY) was up 0.1 percent on the day. The euro weakened 0.2 percent, having briefly traded below $1.09 for the first time since March.
Some analysts said that investors were again shifting towards "carry" trades that use the expanding difference between interest rates on the dollar and those in other currencies to rack up profit.
"The euro was left bruised and battered after the October ECB meeting," analysts from Credit Agricole (PA:CAGR) said in a note to clients.
"We suspect that the euro has also been dragged lower by its appeal as a funding currency at a time when the G10 FX carry trade is staging a return. This is consistent with the single currency having broken to new lows against G10 high-yielding and commodity currencies recently."
Another reason for seeking the security of U.S. assets is the steady depreciation of China's yuan
Beijing spent almost a trillion of its dollar reserves fighting a fall in the currency to similar levels earlier this year but has moved to targeting a broader basket of currencies, meaning dollar gains globally naturally shift the exchange rate.
But with most trade with China still done in dollars that may not ease fears of another deflationary impulse for Western economies as a result.
Sterling, whose 20 percent fall has been the biggest story of the past three months among the majors, was also back on the defensive in the face of the dollar's strength.
The language from European officials towards Britain at Prime Minister Theresa May's first summit since June's vote for a Brexit from the EU did not augur well for the pound. French President Francois Hollande said if May wanted a "hard" Brexit, then negotiations would be very tough.
The pound, generally more stable this week, inched down 0.1 percent to $1.2241.