Traders Are Guessing The Fed – Is This Good?

In the Asian session, the US dollar held on to much of its gains drifting down 8 points to 99.76. The greenback hovered near an 8-month peak against a basket of currencies on Tuesday; supported by expectations the US Federal Reserve is on course to raise interest rates in December. The dollar index held not too far from the 8-month high of 100.00 struck overnight.

The index had fallen to as low as 98.735 late last week in what was considered a corrective phase following days of strong gains fuelled by prospects of tighter US monetary policy.

The euro was little changed at $1.0639 after touching a 7-month trough of $1.0592. The common currency had surged to as high as $1.0736 last week when the dollar came under some pressure.

“About 90 per cent of economists expect the Fed to raise interest rates next month and based on Fed fund futures, investors have pretty much priced in the move, which is why we firmly believed that last week’s correction was technical and not fundamental,” wrote Kathy Lien, managing director of FX strategy for BK Asset Management.

San Francisco Fed President John Williams on Saturday cited a “strong case” for raising rates when Fed policymakers meet next month, as long as US economic data does not disappoint. His comments overshadowed Monday’s lackluster US manufacturing and housing reports.

“For him to acknowledge that there’s a strong case for higher rates next month is a strong signal to the market that there’s increasing consensus at the Fed that rates are likely to rise next month,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

A big healthcare deal failed to impress US stock investors. Pfizer’s announcement of what is expected to be the biggest-ever healthcare deal pushed its shares down 2.6 per cent, making it one of the biggest drags on the S&P. Allergan closed 3.4 per cent lower after the $160 billion deal announcement.

The Dow Jones fell 31.13 points, or 0.17 per cent, to 17,792.68, the S&P 500 lost 2.58 points, or 0.12 per cent, to 2,086.59 and the Nasdaq Composite dropped 2.44 points, or 0.05 per cent, to 5,102.48.

There was little activity in Asia this morning with no data on the economic calendar as most currencies responded to moves in the greenback. The Japanese yen gained 8 points matching the drop in the US dollar to trade at 122.77 while the Aussie gained 8 points to at 0.7200. The kiwi gained a few points to reach 0.6524.

Traders seem to be getting prepared for the ECB and the FOMC well ahead of time, perhaps pushing the dollar to high before December. The ECB meeting will take place the first days of December with the Federal Reserve meeting late in the month. Traders will be closely monitoring the US jobs data also due the first week of December. There is little action on the calendar with the Thanksgiving holiday this week trading is expected to be light.