The dollar rose on Wednesday, hitting its highest level in four months against a basket of currencies, as expectations rose that the Federal Reserve would tighten monetary policy while other major central banks are forecast to loosen policy.
The dollar has benefited recently from strong readings on the U.S. labor market and inflation, which have boosted bets the Fed will raise U.S. interest rates before the end of the year.
Fed funds futures rates show investors see a greater than 50 percent chance the Fed will raise interest rates at least once by its December meeting, according to CME Group's FedWatch tool.
Wednesday was the first time chances of a rate hike have moved above 50 percent since Britain's surprise vote to leave the European Union in June.
The dollar index, which tracks the currency against a basket of six major rivals, hit a peak of97.323 .DXY in European trade, its highest level since March 10. It was last trading at 97.073, little changed on the day.
The pound climbed from a one-week low as a report showed the U.K. unemployment rate fell below 5 percent for the first time since 2005.
Sterling was further boosted by a Bank of England survey which showed that despite an increase in business uncertainty after the June 23 referendum where the U.K. voted to leave the European Union, firms sought to maintain “business as usual.”
The British currency gained versus all of its 16 major peers as data showed the U.K. jobless rate, as measured by International Labour Organisation standards, dropped to 4.9 percent in the three months through May. The median forecast in a Bloomberg survey of economists was for an unchanged reading of 5 percent. Separate wage data showed average weekly earnings unexpectedly fell.
The pound rose 0.6 percent to $1.3183 as of 4:03 p.m. London time, after falling earlier to $1.3065, the lowest since July 12. Sterling strengthened 0.6 percent to 83.54 pence per euro.
The European Central Bank is all but certain to keep rates firmly on hold on Thursday but will have to address an ever growing list of obstacles that threaten once again to derail its efforts to revive growth and inflation.
Italy's bank troubles, Britain's decision to leave the European Union, and a scarcity of bonds to buy in its asset purchase program may all require some action, dashing ECB chief Mario Draghi's hopes that the bank was done after years of extraordinary stimulus measures.
Not keen on hasty moves, Draghi is likely to maneuver through with verbal action, highlighting the increased risks and opening the door to changes as soon as September, when the bank releases fresh economic forecasts.
Bank of England interest rate-setter Kristin Forbes said the central bank might need to cut borrowing costs soon to offset the economic impact of Britain's decision to leave the European Union, but it should not rush into a decision.
"There may be a case to adjust monetary policy soon," Forbes said in an article published by the Daily Telegraph newspaper. "But until more hard data is available, I believe this is a good time to 'keep calm and carry on'."
Oil prices rose as much as 1 percent on Wednesday, lifting U.S. crude from two-month lows, after the U.S. government reported a ninth straight week of crude inventory draws, easing some concerns in a market worried about a glut.
The EIA said crude inventories fell 2.3 million barrels in the week to July 15, close to analysts' expectations for a decrease of 2.1 million barrels.
Brent crude's front-month contract, LCOU6 settled up 51 cents, or 1 percent, at $47.17 a barrel.
Reference: Reuters, Bloomberg
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