Dollar helped by talk of higher rates; Obama in focus

By Anirban Nag

SYDNEY (BestGrowthStock) – The U.S. dollar retained broad gains on Thursday, hovering just below six-month highs on the euro, boosted by speculation over higher interest rates in the U.S. and a general investor apathy toward high-yielding currencies.

Focus is now on President Barack Obama’s State of the Union address due at 0200 GMT and he is likely to push populist themes like curbing Wall Street excesses. [nN26136373]. Last week, Obama’s announcement that he would seek sweeping reforms to curb risky lending by banks spooked financial markets.

The U.S. dollar index (Read more about the global trade. ) (.DXY: ) was firm at 78.67, not far from a five-month high, and looking all set to close above the 200-day moving average of around 78.40 for the second straight day.

The 100-week moving average for the index sits at around 78.92. A weekly close above that level would mean a test of 80 is on the cards and imply a bullish trend for the U.S. dollar.

On Wednesday, the dollar got a boost from a somewhat optimistic tone from the U.S. Federal Reserve. At the end of its two-day meeting, the Fed’s Open Market Committee (FOMC) decided to keep rates unchanged, as expected, and said it intended to end some emergency lending and asset-buying programs.

But what set market aflutter was Kansas City Fed President Thomas Hoenig, who dissented the decision to leave interest rates at near zero. That led to a sell-off in U.S. Treasuries, especially at the shorter end of the curve.

The October fed funds contract implied traders expect a 86 percent chance of the Fed raising rates by a quarter percentage point at its September meeting, up from a 64 percent chance prior the FOMC statement (Read more about the Fed’s FOMC).

The dollar was also helped by news that Fed and other major central banks said they would end emergency dollar lending operations on February 1.

The euro was subdued at $1.4030, off a low of $1.3994 hit on Wednesday which was its lowest since July 15. Traders said option barriers were lined up at $1.4000.

Worries about Greece’s fiscal health continued to weigh on the euro, which has fallen from a high of above $1.51 struck late last year.

“The focus remains on the $1.40 support area, as well as the 78.80 area for the dollar index (Read more about the global trade. ),” JP Morgan said in a note. “Sustained breaks would increase the odds that a deeper corrective phase is underway.”

The dollar stayed around the 90 yen mark, having risen 0.4 percent on Wednesday when it bounced from a low of 89.15 yen. The rebound was helped mainly by the rise in yields on U.S. Treasuries.

Commodity-linked currencies like the Australian and New Zealand dollars underperformed as uncertainties about China’s efforts to restrain bank lending and the Senate vote to confirm Ben Bernanke as Federal Reserve chairman for a second term weighed on sentiment.

The New Zealand dollar barely reacted to the central bank’s decision to keep rates on hold. The move was expected and the Reserve Bank of New Zealand reaffirmed that it was looking at rate rises around the middle of the year.

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(Editing by Balazs Koranyi)

Dollar helped by talk of higher rates; Obama in focus