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Dollar rises on Fed hawks as pound extends slump

Oct 04 2016 16:15
Lukanyo Mnyanda, Rita Nazareth and John Hyland

Edinburgh - The dollar rose the most in two weeks as hawkish comments from Federal Reserve officials spurred wagers that US interest rates will rise this year. The pound slid to its weakest level since 1985. Gold tumbled.

The greenback advanced against all of its 16 major peers, while sterling dropped on mounting investor concern that the UK is heading for a so-called hard Brexit.

Stocks rallied, fuelled by a recovery in banks and a rally in Britain’s equities that sent the FTSE 100 Index above its highest-ever close.

Italy’s longer-dated bonds underperformed as the country held its first sale of 50-year securities. Gold dropped below $1 300 an ounce.

The dollar got a boost as traders increased their wagers on higher US borrowing costs, with the market-implied odds of an increase by December at 60%.

Fed Bank of Cleveland President Loretta Mester said the economy is ripe for a rate hike and repeated that the November meeting should be viewed as "live" for a policy decision. Her Richmond counterpart Jeffrey Lacker urged the central bank to boost rates to head off a likely pickup in inflation that would force bigger increases later.

"We do believe that a December rate hike is in the cards," said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel, Nicolaus & Company, which oversees about $170bn.

"Overall, that’s going to be the critical focus for the next several weeks, and that is going to dictate the dance of the dollar as well."

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