October 18, 2018 / 8:12 AM / a month ago

FOREX-Dollar perched at one-week highs on upbeat Fed

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Oct 18 (Reuters) - The dollar rallied to a one-week high against its rivals on Thursday as upbeat Fed minutes confirmed that policymakers are likely to raise interest rates a few more times until end-2019.

While interest rate differentials haven’t played a big role in the first half of the year in predicting currency trends as trade war concerns have dominated sentiment, that relationship has begun to exert its influence again in recent weeks.

The gap between ten-year U.S. yields and its German counterparts has widened out to three-decade highs of 274 basis points and market watchers expect the spread to widen more in the coming months.

The minutes from the Fed’s Sept. 25-26 meeting showed every Fed policymaker backed raising interest rates and also generally agreed borrowing costs were set to rise further, despite U.S. President Donald Trump’s view that the tightening have already gone too far.

“The minutes confirm that policymakers are expected to raise rates more over the next year and that is helping the dollar gain and the risk off moves last night in Asian stocks is also another factor,” said Richard Falkenhall, senior FX strategist at SEB in Stockholm.

China’s benchmark stock index skidded to four-year lows, sapping appetite for risk taking with the euro down 0.1 percent against the perceived safe-haven Swiss Franc.

Interest rate futures are now pricing in an 83 percent likelihood that the Fed raises rates in December, according to the CME Group’s FedWatch Tool, the fourth hike this year. Two more increases are expected next year.

Against a basket of its rivals , the dollar gained for a third consecutive day, up 0.2 percent at 95.78.

A semi-annual report by the U.S. Treasury report released overnight refrained from naming China directly as a currency manipulator though market watchers said Washington will closely monitor the Chinese currency’s moves.

Deutsche Bank strategists termed the report “as a bit of an escalation without being too dramatic”.

The Chinese currency traded in the offshore market was trading near a three-month low against the dollar at 6.9385 yuan per dollar.

The euro changed hands at $1.1497 on Thursday, trading flat versus the greenback, after losing 0.65 percent on Wednesday. The euro has lost 2.73 percent versus the dollar over the last three weeks

The British pound was flat versus the dollar on Thursday to $1.3110 after Prime Minister Theresa May said London is willing to discuss an extension of the transition period after Britain leaves the European Union. (Reporting by Saikat Chatterjee Additional reporting by Vatsal Srivastava Editing by Matthew Mpoke Bigg)

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