By Ankur Banerjee
SINGAPORE, Sept 14 (Reuters) – The dollar firmed on Monday, with the yen wobbling near a seven-month high as investors pondered possible rate hikes from the Federal Reserve and Bank of Japan later this week, while rising oil prices due to the intensifying war in the Gulf dampened sentiment.
Global policymakers are grappling with erratic pricing pressures from the six-month-long U.S.-Israeli war on Iran that has pushed oil prices well above $100 per barrel and upended the path for rates amid bouts of selloffs in long-end bonds.
The European Central Bank raised rates last week and warned of further hikes, setting the stage for the Fed policy decision on Wednesday and a widely expected rate hike from the BOJ on Friday. The Bank of England is expected to stand pat on Thursday, but the voting is likely to be close.
Traders ramped up bets for a Fed rate hike after data on Friday showed U.S. consumer prices accelerated in August; they priced in an 86% chance of an increase this week and another move higher later in the year, the CME FedWatch tool showed.
“The Fed could decide to wait, but that is complicated by its October meeting being just ahead of the U.S. midterm elections and waiting until December to move will be too long,” said Shane Oliver, chief economist and head of investment strategy at AMP.
The euro was 0.1% softer at $1.1585, while sterling last bought $1.3516. The U.S. dollar index, which measures the greenback against six other currencies, was 0.12% higher at 99.22 after two straight weeks of meager declines.
U.S. Treasury yields remained near multi-year highs, with the 2-year yield , which typically moves in step with Fed rate expectations, easing a touch to 4.6148%, after rising 26 basis points last week. [US/]
The rising yields and shifting rate expectations have so far failed to push the dollar higher as central banks in major economies are also expected to raise rates while worries around Fed policy credibility linger.
Fed Chair Kevin Warsh will need to match his tough rhetoric with policy action or risk further undermining his credibility on controlling inflation, strategists at Commonwealth Bank of Australia said in a note.
“There is a small chance the USD eases if the FOMC hikes but Warsh plays down the risk of follow-up hikes in the press conference,” they said.
Meanwhile, Brent crude futures rose nearly 3% to $107.6 per barrel after new Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf compounded supply concerns following the closure of a key Saudi oil pipeline. [O/R]
RISING YEN FACES BOJ RECKONING
The Japanese yen was 0.3% weaker at 154.03 per U.S. dollar, though it remained not far from the seven-month high of 152.89 that it touched last week. Signs are emerging of a shift in market sentiment for the currency, with speculators turning to a net long position on the yen for the first time since February.
“A 25 bps hike is already almost fully priced,” analysts at MUFG said in a note. “For the yen to strengthen further, the BOJ will have to signal that they are planning to stick to the faster pace of hikes.”
TD Securities analysts said not putting another rate hike on the table for either the October or December meeting risks a knee-jerk dollar/yen rally back to 157 to 160. They expect the BOJ to hike roughly once every quarter, departing from its gradual, semi-annual pace.
The yen is up 4% this month on the back of expectations that the BOJ will be faster in delivering rate hikes and signs of potential repatriation of assets by domestic investors.
“Not hiking would be a catastrophic error. Not communicating robustly will be a significant own goal,” said James Athey, fixed-income portfolio manager at Marlborough, adding that expectations about repatriation and GPIF asset allocation changes are playing a significant role in the yen move.
(Reporting by Ankur Banerjee in Singapore; Editing by Thomas Derpinghaus)
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