By Karen Brettell
NEW YORK (Reuters) - The dollar rose to its highest level since early February against a basket of currencies on Friday, boosted by higher expectations of a Federal Reserve interest rate hike this year and by the euro weakening to seven-month lows.
Hawkish comments from Fed officials including New York Fed President William Dudley and higher expectations that Hillary Clinton will win the U.S. presidential election have increased bets that the U.S. central bank will raise rates in December.
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Dudley said on Wednesday the Fed will likely increase interest rates later this year if the U.S. economy remains on track.
“There have been some Fed comments where they sound like they are ready to move in December, but also partly related is the market view that a hike in December is much more likely if Clinton wins than if Trump wins,” said Steven Englander, global head of foreign exchange strategy at Citigroup in New York.
A victory by Donald Trump is seen as more likely to create uncertainty and possible market volatility, which could delay an interest rate increase.
Traders are pricing in a 70 percent chance that the Fed will raise rates at its December meeting, up from 64 percent two weeks ago, according to CME Group’s FedWatch Tool.
The dollar index <.DXY> rose as high as 98.813, the highest since Feb 3. The euro <EUR=> fell as low as $1.0859, the lowest since March 10.
Weakness in the euro following Thursday's European Central Bank meeting boosted the greenback.
ECB President Mario Draghi left a wide range of options on the table and emphasized that a long-awaited rise in inflation is predicated on "very substantial" monetary accommodation.
Weakness in the single currency was also attributed to a possible rebalancing of reserves by China's central bank as the Chinese currency depreciates at a faster pace than expected.
China's yuan exchange rate <CNY=> slipped past 6.75 per dollar on Friday after the central bank set the daily midpoint weaker than that level for the first time in six years.
"Last night when China began coming off we saw the euro coming off,” Citi's Englander said.
“There's a view that if capital exports from China are running at a strong pace, Chinese residents are buying dollars, which means the dollars get supplied by central banks out of reserves. Then they are unbalanced between dollar reserves and euro reserves so they sell some euros to rebalance with dollars,” Englander said.
(Editing by Meredith Mazzilli and Dan Grebler)