Dollar firmer as Fed maintains hawkish guidance, yen near five-week low

SINGAPORE (Reuters) – The dollar gained against its major peers on Friday as the U.S. Federal Reserve kept interest rates steady but reaffirmed its monetary tightening stance, setting the stage for a rate hike in December.

Broader risk appetite took a step back in global trade, following this week’s strong Wall Street relief rally after the U.S. midterm elections produced no major political surprises for investors.

In foreign exchange markets, investor focus is now shifting back to the divergence between the monetary policies of the United States and other major economies, such a Japan where interest rates are seen staying extremely low. The yen, as a result, remains near a five-week low against the dollar.

The dollar index .DXY, a gauge of its performance against six major peers traded at 96.63 on Friday, after clocking a gain of 0.66 percent on Thursday.

“The Fed looks set to raise rated in December. They have been largely unfazed by the equity market correction in October,” said Ray Attrill, head of currency strategy at NAB.

Attrill added that the dollar strength also follows a weak euro and a jittery sterling over the last few trading sessions.

The Fed has raised its key policy rate three times this year, and the market expects another rate hike in December on the back of a robust U.S. economy, rising inflation and solid jobs growth.

According to the CME group’s FedWatch tool, the likelihood of the Fed raising rates by another 25 basis points in December is 75 percent.

The dollar has gained 2.4 percent versus the yen over the last 10 trading sessions due to the diverging monetary policies of the Fed and the Bank of Japan.

While the Fed is on track to raise interest rates, the BOJ is expected to keep its ultra loose monetary policy due to low growth and inflation.

The widening interest rate differential between U.S. and Japanese bonds has made the dollar a more attractive bet than the yen, which is often a funding currency for carry trades.

Meanwhile, the euro EUR= traded at $1.1366 on Friday, relatively unchanged in early Asian trade. The single currency fell 0.54 percent on Thursday as traders reacted to negative news out of Europe.

The European Commission forecast on Thursday that the Italian economy would grow more slowly in the next two years than Rome thinks, making government budget deficits much higher than assumed by Italy.

The standoff between the EU and Rome over Italy’s budget deficit and concerns over Europe’s slowing economic growth have dragged the euro which has fallen 4.2 percent versus the dollar over the last six months.

The British pound GBP= changed hands at $1.3062 on Friday, trading marginally higher versus the dollar. The sterling has gained 2.3 percent against the dollar in November.

The pound has benefited from growing investors expectations that Britain is close to reaching a deal with the European Union less than five months before it is due to exit the bloc.

The Australian dollar AUD= gained 0.1 percent to trade at $0.7262. The Aussie dollar has rallied more than 3.3 percent since it hit a more than a two-year low of $70.18 on Oct. 26.

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