Dollar edges higher as Fed's Dudley offsets weak U.S. jobs data

NEW YORK (Reuters) - The dollar rose against a basket of currencies on Friday as a top Federal Reserve official’s remarks convinced some investors that U.S. interest rates could rise faster than expected even though April hiring data was weaker than forecast.

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011. REUTERS/Kacper Pempel

New York Fed President William Dudley told the New York Times it was reasonable to expect the U.S. central bank would raise rates twice in 2016 despite data that showed domestic hiring fell to 160,000 in April, its lowest in seven months.

Dudley is a permanent voter on the Fed’s policy-setting group and his view is seen as aligned with Fed Chair Janet Yellen.

Earlier bets in the futures market implied traders expected the Fed would not raise rates until 2017, according to the CME Group’s FedWatch program.

“It’s more hawkish than market expectations. Futures are barely pricing in one hike,” Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.

Since Dudley’s comments, futures now suggest traders see one rate hike in December as a toss-up.

A majority of Wall Street’s top firms shifted their forecast on a Fed rate hike to September from June, a Reuters poll released late on Friday showed. [FED/R]

The dollar index, which measures the greenback against six currencies, was last up 0.1 percent at 93.857. It had fallen as much as 0.6 percent earlier in the day.

The initial dollar selling faded as some traders had already scaled back their dollar holdings following a disappointing ADP private employment report on Wednesday, analysts said.

“The market already shifted down its expectations ahead of the release of the payrolls data. Investors are going flat heading into the weekend,” said Charles St-Arnaud, currency strategist at Nomura Securities International in New York.

While the job gains fell short of expectations, a 0.3 percent increase in average hourly earnings was a bright spot in the report.

The dollar index has recovered about 2 percent from a trough of 91.919 hit on Tuesday, its lowest since January 2015.

The greenback was 0.1 percent lower against the yen at 107.12 yen. Friday’s decline snapped a three-day winning streak in which it retraced from an 18-month low of 105.55 struck on Tuesday.

The euro, which had hit an eight-month peak of $1.1616 on Tuesday, ended little changed on the day at $1.1398.

The Australian dollar was down 1.4 percent to $0.7366 after hitting a two-month low of $0.7338. The Aussie declined 3.3 percent this week after the Reserve Bank of Australia slashed its inflation forecasts, hinting the door was open for another interest rate cut.

Reporting by Anirban Nag in London; Shinichi Saoshiro in Tokyo; Editing by Meredith Mazzilli and David Gregorio