The dollar climbed against a basket of currencies on Wednesday, underpinned by lofty U.S. yields after upbeat consumer spending data kept alive expectations the U.S. Federal Reserve would raise interest rates.
Two-year Treasury yields reached their highest in over four years and long-dated U.S. yields their highest in nearly two months before a Fed meeting that starts on Wednesday.
The rise in two-year yields widened the spread between U.S. and German government bonds to its highest in eight years and helped the dollar recover.
The dollar index was up at 95.659, off a two-week low struck on Monday. The euro was down 0.15 percent at $1.1252 . The dollar was flat against the yen at 120.39 yen .
The retail sales data prompted some investors to increase their bets that the Fed would raise interest rates for the first time since June 2006. U.S. interest rates futures implied that the market placed a 27 percent chance of an increase on Thursday , up from 23 percent late on Monday, according to CME Group's FedWatch program.
Still, many are betting that recent volatility in global markets and increasing evidence of slowing growth in China will prompt the Fed to hold fire this month.
"The market is underpricing the chance of a Fed move tomorrow, which is keeping the dollar pegged back," said Manuel Oliveri, FX strategist at Credit Agricole. "And even if the Fed doesn't act tomorrow, we expect hawkish comments at the press conference and that should be bullish for the dollar."
Stocks on Wall Street rose 1 percent on Tuesday, in part helped by the data showing healthy growth in consumer spending. Manufacturing, though, remained soft, pressured by the effect of the strong dollar on exporters, slack economies oversees and lower oil prices.
Also, inflation has been undershooting Fed forecasts for the past three years and wage growth has lagged improvements in the U.S. labour market, creating a conundrum for policymakers.
"Our U.S. economists expect the Fed to remain on hold at its September meeting, deferring rate hikes while it assesses downside risks to the outlook after recent financial market stress," analysts at Barclays said.
"We expect Fed Chair (Janet) Yellen to emphasize data-dependence and that every meeting remains 'live,' but we believe concerns about external demand and inflation will delay hikes until March 2016," they said in a note
source: Reuters
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