Dollar Reaches 3 Week High

The USD climbed to a 3 week high against the Japanese Yen today as bond yields reached their highest since June and a stock sell off was spurred by remarks made by senior Federal Reserve officials who had implied a US near-term interest rate hike was very much in the picture. Over the last few months, the Feds have maintained a large uncertainty concerning the issue of a rates hike this year spurring some confusion for investors all over the world, seem to have given a significant amount of clarity to the issue last week after a spate of comments made by senior Feds officials. Fed Chair Janet Yellen in her speech at the Fed’s annual gathering for global central bankers in Jackson Hole, Wyoming gave a very clear indication that a rate hike was most likely around the corner.

She made it clear that the case for an interest rates hike had been reinforced in recent months as the economy and the labour market had posted encouraging figures. Her statements strengthened what many other senior Fed officials had been saying in the days leading up to her speech at Jackson Hole. And while she gave no hints on the timing of a hike, Fed vice Chair Stanley Fischer said Yellen's speech was consistent with expectations for possible rate increases this year. Fischer said Friday's nonfarm payrolls report for August was likely to be key to the decision over a hike in the near term.

"Fischer confirmed the broad view on the Fed Open Market Committee that the economy has strengthened of late and that interest rates should be raised gradually; possibly again next month if this week's employment report supports a rate rise," said Stewart Richardson, chief investment officer at RMG Wealth Management. “U.S rates are likely to rise, whereas the European Central Bank, the Bank of Japan and the Bank of England are still looking to ease policy. This policy divergence should be supportive for the dollar."

Traders believe that if a strong number is reported in this week’s NFP release, it could result in a break out of recent ranges in the Dollar.

"If the payrolls figure is strong, the dollar could move toward a test of the 105 level against the yen," said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities in Tokyo.

Despite the chorus of hawkish comments from Fed officials in recent days, speculators trimmed bets on the dollar for a fourth straight week in the week ended Aug. 23, reducing net dollar-long positions to their lowest since early July. The chances of a hike in September has grown to 33% in the wake of the Fed Chair’s comments, from a previous 21% reported on Thursday, according to CME Group's FedWatch tool.

The prospects of higher U.S. interest rates saw European shares lose ground. Germany's DAX was 1.2% lower, while the blue-chip Euro Stoxx 50 was down 0.6%. British markets are closed for a holiday.