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European Session – Stronger dollar, rising US Treasury yields on Fed rate hike expectations

The dollar strengthened broadly as US treasury yields rose on growing expectations of a Fed rate hike in December.

Risk appetite was generally up today resulting in many investors moving away from the perceived safety of government bonds. A flow to riskier assets hurt safe haven currencies, leading to a weaker yen and euro.

The euro weakened against the dollar also because of the widening interest rate differential and diverging monetary policies between the Fed and the ECB. The single currency came under pressure throughout the European session and slid to 1.0935 from a session high of 1.1029.

The dollar rose against a softer yen to reach a high of 121.21 yen. Monday’s US ISM manufacturing PMI had little impact on the greenback. The dollar pushed higher until the US factory orders data before turning around to ease slightly to 121.08 as the numbers disappointed. Factory orders fell for a second straight month in September to -1.0% from a downwardly revised 2.1% drop in August. Forecasts were for a drop of 0.9% in September.

Investors look to Friday’s nonfarm payrolls data as they are more important with respect to the Fed’s decision over whether to lift interest rates in December. Ahead of the NFP report, Wednesday’s private ADP jobs report will also be closely watched.

Sterling continued to fall against the dollar from Monday’s peak of 1.5496 to 1.5358. Today’s UK data on construction PMI matched estimates to fall to 58.8 in October from 59.9 in September. This soft data added additional downside momentum to the pound today, coupled with a broadly stronger dollar. Any recovery for the pound would be limited ahead of Thursday’s Bank of England policy statement and Quarterly Inflation Report.

The Australian dollar trimmed post-RBA gains made in Asia versus the greenback. After the RBA held rates, the aussie rose to a high of 0.7218 but it eased down to 0.7150 in European trading. Focus now turns to Australian retail sales and trade data due on Wednesday.

The New Zealand dollar took a tumble versus the US dollar after news that international dairy prices fell in this month’s first auction held by New Zealand’s Fonterra Co-operative Group, the world’s biggest dairy exporter. The kiwi dropped to 0.6649. Earlier in the day it reached as high as 0.6778. New Zealand’s dairy sector generates more than 7% of the nation’s GDP, so dairy prices affect the currency substantially.

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