Dollar strengthens for fifth day before payrolls

Sydney - A gauge of the dollar rose for a fifth day, its longest rally since May, amid speculation a US payrolls report will back the case for the Federal Reserve to raise interest rates this year.

The US currency advanced to the strongest in two months against the euro as economists predicted the data will show hiring rebounded from a three-month low set in August. The odds of a rate increase this year climbed to 64% as reports showed gains in durable-goods orders, services and manufacturing.

The pound plunged as much as 6.1%, the biggest decline since the day the UK’s Brexit referendum result was announced, in a move traders said was exacerbated by computer-initiated sell orders.

“A strong U.S. September non-farm payrolls report will raise odds of a December Fed funds rate hike and push the dollar higher,” said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia in Sydney.

“As the economy is near full employment, the pace of wage growth will have more market impact than the pace of job gains.”

The Bloomberg Dollar Spot Index, which measures the US currency against 10 major peers, climbed 0.2% as of 6:54 in London, headed for its highest close since July 26. The gauge has risen 1.4% this week, its biggest gain since the period ended May 6.

The dollar advanced 0.3% to $1.1119 per euro after reaching $1.1110, the strongest since August 9. The yen was the only major currency to strengthen against the dollar Friday, rising 0.1% to 103.84, snapping an eight-day run of declines.

Signs of improvement in the US economy have helped the dollar index trim this year’s losses to 2.7%. The greenback has been supported by comments from officials including Chicago Fed President Charles Evans and Richmond Fed President Jeffrey Lacker that a rate increase is increasingly likely this year.

A Bloomberg index tracking economic surprises in the US turned positive on Wednesday for the first time since August, meaning that more reports are beating forecasts. The market-implied probability of a rate increase by year-end has risen from 51% at the start of last week.

US central bank officials set to speak Friday include Cleveland Fed President Loretta Mester, who said this week the case for a rate increase would still be “compelling” when the Fed Open Market Committee meets November 1 to 2.

Fed Vice Chairman Stanley Fischer, Governor Lael Brainard and Kansas City Fed President Esther George are also scheduled to appear at the Institute of International Finance’s annual meeting in Washington.

Pound drops

Sterling sank to $1.1841 in early Asian trading, the lowest since March 1985, according to data compiled by Bloomberg. Sterling pared losses to trade 1.2% weaker at $1.2467.

Some traders saw the possibility of human error, a so-called “fat finger,” with algorithms adding to selling pressure at a time of day where liquidity is typically low.

Others pointed to a Financial Times article citing French President Francois Hollande as saying the UK must suffer the consequences of leaving the European Union.

“It looks like it was a algorithm-driven flash crash triggered by a Financial Times article based on French President Hollande’s speech on Brexit,” said Angus Nicholson, a markets analyst at IG in Melbourne.

“Given low volumes in the Asian session, it would have forced other algorithms to join in and magnify the fall.”