Dollar gains as US growth supports rate-hike view

JUL 31, 201512:12 AM

[NEW YORK] The dollar rose to its highest in a week against a basket of currencies Thursday as news of faster US economic growth in the second quarter supported expectations that the U.S. Federal Reserve will raise interest rates as early as September.

The government's first assessment of gross domestic product growth in the second quarter was 2.3 per cent, swifter than a revised 0.6 per cent in the first quarter but lower than the consensus 2.6 per cent forecast of analysts polled by Reuters.

The data followed the Federal Reserve's statement on Wednesday, which some traders saw as bullish for the greenback. Fed policymakers said they felt the economy had overcome a first-quarter slowdown and was expanding moderately, with "solid job gains" in recent months. That left the door open for a possible rate hike when policymakers next meet in September.

"The latest GDP report confirms the Fed's narrative that the first-quarter weakness was transitory. The bar for them to hiking rates is not very high," said Ian Gordon, G10 currency strategist at Bank of America Merrill Lynch in New York.

The dollar index rose 0.6 per cent to 97.545 after touching 97.665, its highest in a week. The greenback strengthened against major currencies following the second-quarter GDP news.

It was up 0.3 per cent at 124.33 yen, while the euro shed 0.5 per cent to US$1.0925.

The euro faced further selling pressure on a Financial Times report that said the International Monetary Fund couldn't officially join bailout talks with Greece until the debt-laden nation agrees to comprehensive reforms.

While recent economic data has raised the chances of a US rate increase, some analysts caution that Greece's unresolved debt woes and turmoil in China's financial markets may worsen, forcing the Fed to postpone a rate hike in September.

"It's not a done deal, but we are still of the view that a September (rate hike) liftoff is on the cards, contingent on the view that the data out of the US continues to be firm," said Sue Trinh, RBC Capital Markets' senior currency strategist in Singapore.

The dollar's renewed strength put pressure on commodities prices and currencies closely linked to them.

The Canadian dollar and Australian dollar were down 0.6 per cent and 0.2 per cent at US$1.0325 and US$0.7280, respectively. The New Zealand dollar fell 1 per cent to US$0.6590.

REUTERS