Dollar hits four-month high as markets raise bets on Fed rate hike

By Dion Rabouin

NEW YORK (Reuters) – The dollar rose on Wednesday, hitting its highest level in four months against a basket of currencies, as expectations rose that the Federal Reserve would tighten monetary policy while other major central banks are forecast to loosen policy.

The dollar has benefited recently from strong readings on the U.S. labor market and inflation, which have boosted bets the Fed will raise U.S. interest rates before the end of the year.

Fed funds futures rates show investors see a greater than 50 percent chance the Fed will raise interest rates at least once by its December meeting, according to CME Group’s FedWatch tool.

Wednesday was the first time chances of a rate hike have moved above 50 percent since Britain’s surprise vote to leave the European Union in June.

The dollar index, which tracks the currency against a basket of six major rivals, hit a peak of 97.323 <.DXY> in European trade, its highest level since March 10. It was last trading at 97.073, little changed on the day.

“I wouldn’t be surprised if people are coming to the conclusion that as the world now has Brexit behind us, the Fed is changing its tune and revisiting a rate hike,” said Fabian Eliasson, vice president for currency sales at Mizuho Corporate Bank.

The dollar rose 0.77 percent against the yen to 107.01 yen , its highest level since June 13, rebounding above its levels before the Brexit vote.

The yen has been sold by investors as expectations have grown the Bank of Japan will pursue additional monetary easing, possibly in conjunction with the Japanese government.

The euro was flat against the dollar ahead of the European Central Bank policy meeting on Thursday. Policymakers are not expected to announce further easing but could signal a bias for monetary stimulus in the future, analysts said.

Meanwhile, sterling outperformed, rising 0.8 percent to $1.3216 after a Bank of England survey showed no clear evidence of slowing economic activity after last month’s Brexit vote and Bank of England policymaker Kristin Forbes said the central bank could potentially wait to cut borrowing costs, saying that now was “a good time to ‘keep calm and carry on.'” [nL8N1A65VY]

Turkey’s lira weakened significantly against the dollar after ratings agency S&P lowered its sovereign credit outlook to “negative” from “stable,” saying the polarization of politics had further eroded checks and balances.

The dollar has risen 7.5 percent against the lira since Friday when the country’s army attempted to topple President Recep Tayyip Erdogan. The greenback rose to 3.0960 lira on Wednesday, its highest level on record.

(Reporting by Dion Rabouin; Editing by Bill Trott and Chizu Nomiyama)