LONDON, July 30 (Reuters) – The dollar rose to its highest level this week on Thursday after the U.S. Federal Reserve took another small step towards raising interest rates later this year, reinvigorating those betting on another surge for the dollar if and when the Fed delivers. “The latest GDP report confirms the Fed’s narrative that the first-quarter weakness was transitory”, said Ian Gordon, G10 currency strategist at Bank of America Merrill Lynch in New York.
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U.S. debt yields fell as the wage report may temper Federal Reserve plans to raise interest rates later this year. Data showed economic growth in the United States accelerated in the second quarter, backed by solid consumer demand, to a 2.3 percent annual rate.
The yield on benchmark 10-year US Treasuries rose to 2.314 percent in Asian trading, compared to its US close of 2.277 percent on Wednesday, when it ended off session highs touched in the wake of the central bank’s announcement. Rates on T-bills with durations of less than a year are at their highest so far this year. However, it didn’t provide any clarity as to whether it expects to move its Fed funds target rate from zero in September, as many economists expect, or whether a December rise is more likely, as the futures markets now forecast.
To that end, some measures of Fed rate expectations suggest nearly no probability the central bank will move before December. In recent weeks and months, policymakers have also stressed that the timing of the initial rate rise is less important than how the economy evolves thereafter.
The dollar pushed higher against the euro and the yen on Thursday after encouraging U.S. economic data moved investors to nudge forward their expectations for higher borrowing costs.
Since the Fed has increasingly de-emphasized the timing of a first rate increase, and especially since Fed Chair Janet Yellen’s mid-July testimony to Congress, “the markets started to price in a more hawkish Fed”, said Com Crocker, managing director of global inflation markets at Mesirow Financial in New York.
“If we do now get bulled up again about the dollar, the big commodities currencies are set for a pretty thin August”, Derrick said.
And a type of interest rate swap designed to anticipate the Fed policy rate around the time of its next meeting in September now reflects a rate around 2 basis points above the top of the Fed’s current target range. That left the door open for a hike in interest rates in September, which would be the first rise since 2006.
“T-bill rates are usually the last to move”.
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Fed policymakers “held steady in their data-dependent strategy, noting that a rate hike would be appropriate once they have seen ‘some further improvement in the labor market, ‘” said Kim Chase at BBVA Research.
