U.S. Dollar Surges on Increased Probability of Rate Hike

December U.S. Dollar Index futures jumped to 98.775, just slightly below the March 2 top at 98.79. The market is deriving its strength from higher expectations of a U.S. Federal Reserve interest rate hike sooner-rather-than-later, likely December, and a weakening Euro.

Hawkish Fed comments earlier in the week and strong economic data are also supporting the dollar and to a lesser extent, a likely win by Democratic candidate Hillary Clinton.

Traders are now pricing in the probability of a Fed rate hike at 74 percent. This is up from 64 percent two weeks ago.

EUR/USD

The EUR/USD remained under pressure on Friday, following the European Central Bank’s interest rate and policy decision. Sellers started to hit the market on Thursday after Draghi was unclear over future policy, namely whether to implement additional stimulus or begin tapering current bond purchases. However, he also emphasized that long-awaited rise in inflation is predicted on “very substantial” monetary accommodation.

Sellers are also saying a weaker Yuan is behind some of the pressure on the Euro. Chinese residents are buying dollars, which means the central bank has to sell Euros to balance its dollar and Euro reserves.

AUD/USD

The AUD/USD also continued to plunge in reaction to the stronger dollar and Thursday’s disappointing Australian jobs report. The new labor data suggests the Reserve Bank of Australia may have to reconsider its monetary policy strategy, increasing the possibility of a sooner-than-expected rate cut.

NZD/USD

The sell-off by the NZD/USD accelerated on Friday as more investors began pricing in the widely expected rate cut by the Reserve Bank of New Zealand in early November.

Gold

December Comex Gold futures were under pressure on Friday, but still in a position to post a gain for the week. Prices are being pressured by a strong U.S. Dollar, but supported by the weaker stock market. The recent price action suggests that a Fed rate hike has already been priced into the market. Other support is being provided by increased buying of the SPDR Gold Trust. Holdings increased 0.31 percent to 970.18 tonnes on Thursday. Holdings are up 2.3 percent in October.

Crude Oil

December Crude Oil prices are down on Friday as investors continue to react to the stronger U.S. Dollar and technically overbought trading conditions. The market is also set up for a lower close on the weakly chart, which could lead to further selling early next week.

In other news, Russian Energy Minister Alexander Novak said on Friday an oil production freeze was necessary to prop up prices and that he would make proposals to Saudi officials this week-end.