Dollar rises to one-month high on rate-hike view, sterling drops

An employee of a bank counts US dollar notes at a branch in Hanoi

By Richard Leong

NEW YORK (Reuters) – The dollar hit a one-month high on Tuesday against a basket of currencies on the view the Federal Reserve may raise interest rates once more this year, while sterling tumbled after the Bank of England’s head threw cold water on the notion it was close to raising rates.

The greenback grinded higher following comments from New York Fed President William Dudley on Monday who said further improvement in the U.S. labor market would kindle inflation, which has shown signs of flagging in recent months. If it were to rebound, this would leave the door open for the possibility of another rate hike by year-end after two hikes so far this year.

The U.S. central bank as expected raised key overnight borrowing costs by a quarter point to 1.00-1.25 percent last Wednesday.

“We had a hawkish Fed last week. We seemed to have had a delayed reaction as the dollar had been oversold,” said Mazen Issa, senior currency strategist at TD Securities in New York.

Since last week’s Fed meeting, a few policy-makers expressed caution about another rate increase in the coming months.

Chicago Fed President Charles Evans said on Monday it may be worthwhile for the Fed to wait until year-end to decide on another rate hike due to recent weak inflation data.

The dollar also received support on remarks from top Republicans who spoke of completing U.S. tax reform in 2017, widely seen as a likely boost to economic growth. Doubts persist whether it is possible due to the divides within the Republican party and its acrimony with Democrats, analysts said.

“There might be tax reform this year,” said Stan Shipley, strategist at Evercore ISI in New York. “But that’s a brave assumption.”

The index that tracks the greenback versus six currencies <.DXY> was up 0.3 percent at 97.800 after touching 97.871 earlier Tuesday, which was the highest since May 18.

The euro fell to a three-week low of $1.1117 <EUR=>, while the dollar reached 111.86 yen, the highest since May 26 <JPY=>, Reuters data showed.

The dollar fared best against the British pound among major currencies. It gained after BoE Governor Mark Carney said now was not the time to raise UK interest rates. Last week three BoE policymakers had voted in favor of a rate hike.

Carney warned of weak wage growth and a likely hit to incomes as Britain prepares to leave the European Union, sending sterling to a two-month low of $1.2603 <GBP=D3>, down 0.9 percent.

(Additional reporting by Jemima Kelly in Paris; Masayuki Kitano in Singapore; Editing by Hugh Lawson and Tom Brown)