Dollar extends 4-week rising streak but risks lurk

LONDON (Reuters) - The dollar edged higher against a basket of rivals on Monday after posting four consecutive weeks of gains as financial markets braced for the first rate hike of the year from the U.S. Federal Reserve.

A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

With new Fed Chair Jerome Powell’s first monetary policy meeting this week, bond markets have already priced in one rate hike followed by two more later in the year. Investors will be closely watching whether Powell shifts expectations of future rate hike expectations.

Positioning data on some bank models such as BNP Paribas show investors have already begun unwinding their short positions on the dollar in the run-up to the policy this week, though futures data indicate reflect a slightly more cautious stance towards the dollar.

Risk aversion was also evident in financial markets with stock futures in Europe starting on a weaker note and the volatility index firmer as the finance ministers of the 20 big world powers meet for a key G20 summit on Monday.

“There is a slight undertone of risk off sentiment that is supporting the dollar,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

The dollar index against a basket of six major peers rose 0.1 percent to 90.345. On Friday, the index hit a two-week high near 90.38, getting a boost after data showed a February surge in U.S. industrial production.

But investors warned against reading too much into the dollar bounce as the greenback was expected to remain weak, echoing the pattern of the past year by weakening in the aftermath of the rate hikes, according to strategists at BNP Paribas.

Traders are also nervous after weekend polls suggested a massive drop in public support for Prime Minister Shinzo Abe over his handling of a festering cronyism scandal, which has raised doubts about his ability to press forward with his reflationary economic agenda including monetary easing.

Speaking in parliament on Monday, Abe took responsibility for a loss of trust in his government, but denied he or his wife had intervened in a land sale to a school operator with ties to his wife.

The euro eased 0.1 percent against the dollar at$1.22755.

Sterling was flat at $1.3941 in a big week for the British currency with employment and inflation data due, followed by a crucial summit between European and British officials to secure a Brexit transition arrangement.

Elsewhere, the Hong Kong dollar plumbed to a fresh 33-year low against the greenback towards the lower end of a currency trading band.

Reporting by Saikat Chatterjee; Additional reporting by Hideyuki Sano and Masayuki Kitano in TOKYO; Editing by Toby Chopra