U.S. dollar climbs as Fed likely to deliver another big hike; sterling slumps

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By Gertrude Chavez-Dreyfuss and Alun John

NEW YORK/LONDON (Reuters) - The dollar gained across the board on Monday, regaining some ground it lost earlier in the month, bolstered by expectations of another supersized rate increase at this week's Federal Reserve monetary policy meeting.

In contrast, sterling was on the defensive against the dollar and the euro, despite market forecast of another 75 basis-point rate hike by the Bank of England later this week as well.

Investors widely expect the Fed on Wednesday to raise its benchmark overnight interest rate by 75 basis points to a range of 3.75% to 4.00%, its fourth such increase in a row.

"The prospect of another 75 basis-point hike by the FOMC (Federal Open Market Committee) on Wednesday and a solid, even if slower, jobs report on Friday keeps the dollar bulls in charge," wrote Marc Chandler, chief global strategist, Bannockburn Global Forex in New York.

He added, though, that the dollar's intraday momentum indicators are stretched. A more sustained pullback in the dollar is likely.

In mid-morning trading, the dollar rose 0.9% against the struggling yen to 148.72 yen. For the month of October, the dollar was up 2.7%, on track to post its third monthly gain.

On Monday, Japan's finance ministry said it spent a record $42.8 billion on currency intervention this month to prop up the yen. A steep drop in the yen to a 32-year low of 151.94 JPY=EBS to the dollar on Oct. 21 likely triggered the intervention, followed by another one on Oct. 24.

The dollar likewise climbed against the Swiss franc, rising 0.7% to 1.0024 francs.

The greenback, however, was set for a monthly decline of 0.5% in October, based on the dollar index. That would be its first fall since May and only its second this year amid expectations the U.S. Federal Reserve could signal a less aggressive future programme of rate hikes at its policy meeting that begins on Tuesday.

"Currency markets are in wait-and-see mode ahead of the (Fed's rate setting) FOMC meeting on Wednesday after we saw a bit more of a balanced tone from some other central banks," Samy Chaar, chief economist at Lombard Odier, said.

"The question is will the Fed follow through - it's not going to be a dovish pivot, it's far too soon to loosen financial conditions - but will we get something more balanced rather than another hawkish surprise?"

Sterling fell 1% against the dollar to $1.1484. The BoE is likely to deliver a 75-basis point hike at Thursday’s meeting, although analysts said but longer-term rate expectations are coming under sustained pressure.

The euro rose 0.3% against sterling to 86.02 pence.

BoE Deputy Governor Ben Broadbent recently suggested that the borrowing costs priced by investors in the would hammer the economy, noting that Britain could engineer a "soft-landing" - a U.S. term for bringing inflation back to target without significantly damaging the real economy.

The euro dropped 0.8% against the dollar to $0.9889. The euro barely reacted after data released on Monday that showed eurozone inflation came in hotter than expected at 10.7%, a fresh record high.

Elsewhere, the Chinese yuan slumped after data released on Monday showed China's factory activity unexpectedly fell in October, weighed down by softening global demand and strict domestic COVID-19 curbs.

The dollar was last 0.8% higher against the yuan traded offshore at 7.325. [CNY/]

The Reserve Bank of Australia (RBA), meanwhile, is tending towards the dovish end of the spectrum and is expected to raise interest rates by a more modest 25 bp at its Tuesday meeting, even as inflation raced to a 32-year high last quarter.

The Aussie dollar was down 0.6% US$0.6375

The U.S. dollar climbed 2% on Brazil's Real after former president Luiz Inacio Lula da Silva narrowly defeated President Jair Bolsonaro in a run-off election.

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Currency bid prices at 10:56AM (1456 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 111.5100 110.8100 +0.65% 16.565% +111.6100 +110.7200

Euro/Dollar $0.9888 $0.9968 -0.79% -13.01% +$0.9966 +$0.9881

Dollar/Yen 148.7750 147.4350 +0.92% +29.24% +148.7800 +147.5500

Euro/Yen 147.11 146.93 +0.12% +12.88% +147.7500 +146.8300

Dollar/Swiss 1.0027 0.9959 +0.68% +9.92% +1.0028 +0.9962

Sterling/Dollar $1.1499 $1.1615 -0.99% -14.97% +$1.1612 +$1.1484

Dollar/Canadian 1.3664 1.3606 +0.43% +8.07% +1.3685 +1.3601

Aussie/Dollar $0.6374 $0.6412 -0.55% -12.29% +$0.6428 +$0.6368

Euro/Swiss 0.9917 0.9925 -0.08% -4.36% +0.9941 +0.9909

Euro/Sterling 0.8599 0.8577 +0.26% +2.37% +0.8618 +0.8573

NZ $0.5780 $0.5816 -0.58% -15.52% +$0.5835 +$0.5781

Dollar/Dollar

Dollar/Norway 10.4040 10.3335 +0.65% +18.07% +10.4105 +10.3500

Euro/Norway 10.2917 10.2923 -0.01% +2.78% +10.3247 +10.2691

Dollar/Sweden 11.0413 10.9395 +0.12% +22.44% +11.0476 +10.9466

Euro/Sweden 10.9188 10.9062 +0.12% +6.69% +10.9293 +10.8920