FOREX-Dollar falls as traders bet Fed to raise rates

By Ankur Banerjee

SINGAPORE, Nov 3 (Reuters) – The dollar weakened on Friday and was on course for a weekly decline against a basket of currencies as traders bet the U.S. Federal Reserve was most likely to end raising rates, lifting risk sentiment.

The dollar index, which measures the U.S. currency against six rivals, fell 0.122% to 106.07, not far from a weekly low of 105.80 hit on Thursday.

The index is on track to drop 0.4% for the week, marking just the third week of losses in the last 16 weeks.

Markets now see a less than 20% chance of a rate hike in December, down from 39% earlier, CME’s FedWatch tool showed, as a result of the US central bank holding interest rates steady on Wednesday. However, the Fed left the door open to further increases in borrowing costs in line with the economy’s resilience.

“The Fed is now walking a tightrope between financial conditions and raising rates,” said Moh Siong Sim, currency strategist at Bank of Singapore, adding that the Fed said rising bond yields were doing some of the work for it and it could afford to wait and see.

However, since the Fed’s policy decision, the 10-year Treasury yield has fallen by more than 20 basis points. A holiday in Japan meant no cash was traded in Asia on Friday.

“There are still underlying tensions here that could be worrisome, but for now the market has relaxed,” Sim said.

Data on Thursday showed that the number of Americans who filed new claims for unemployment benefits rose slightly last week as the labor market continued to show no signs of a significant slowdown.

Investors’ focus will shift to October nonfarm payrolls data later in the day, with the U.S. expected to add 180,000 jobs in October, according to a Reuters poll of economists. A weaker result is likely to put further pressure on the dollar.

“Even if October non-farm payrolls beat expectations, it would not necessarily support calls for the Fed to hike in December,” said Julien Lafargue, chief market strategist at Barclays Private Bank.

“It really seems that the central bank is more focused on inflation than on jobs and economic growth.”

Analysts said upcoming economic data is likely to determine whether the dollar’s weakness will be permanent.

Christopher Wong, currency strategist at OCBC, said an entrenched disinflationary trend and a substantial easing of tensions in the US labor market and activity data were needed for the dollar to trade softer.

But for now, Wong said, the dollar still retains “a significant yield advantage and is somewhat of a safe haven.”

Elsewhere, the pound was at $1.2198, down 0.02% from Thursday, up 0.4% on Thursday and on course for a weekly gain of 0.5%. The euro gained 0.05% to $1.0625, also set for a weekly gain of 0.5%.

The Bank of England joined other major central banks in keeping rates steady on Thursday, stressing that it does not expect to start cutting them anytime soon.

The European Central Bank broke a streak of 10 straight rate hikes last week, with the debate shifting to how long rates will stay high.

ECB board member Isabel Schnabel said on Thursday that the “last mile” of disinflation may be the toughest and the central bank cannot yet close the door on further rate hikes.

The yen gained 0.11% to 150.28 per dollar, keeping traders nervous and looking for signs of intervention by Japanese authorities.

The yen has had a tumultuous week, touching a one-year low against the dollar and a 15-year low against the euro on Tuesday after the Bank of Japan adjusted its yield curve control policy.

Central bank Governor Kazuo Ueda will continue to unwind his ultra-loose monetary policy and seek to exit a decade-long accommodative regime next year, six sources familiar with the central bank’s thinking said on Thursday.

The Australian dollar was little changed at $0.6434, just shy of a more than one-month high of $0.6456 touched on Thursday. The New Zealand dollar was 0.12% higher at $0.5901.

Both the Aussie and Kiwi rose 1.6% for the week, their best weekly performance since mid-July.

(Reporting by Ankur Banerjee and Rae Wee in Singapore; Editing by Gerry Doyle and Kim Coghill)

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