Dollar edges higher against basket of currencies in Europe

The dollar edged towards a two-month high against a basket of currencies on Tuesday and was on track for its strongest month in six, as expectations grew that US interest rates will rise in the coming months. Against the yen, the dollar was heading for its best month in 1 1/2-years. It has gained more than 4 percent since early May after Japanese officials warned several times they would intervene to weaken the currency.
The latest trigger for dollar strength came from Federal Reserve Chair Janet Yellen, who said on Friday a rate increase in the coming months "would be appropriate" if the economy and labour market continued to improve. The biggest gainer of the day, though, was the Australian dollar. It climbed almost 1 percent against its US counterpart after stronger-than-expected domestic economic data.
In London, Bank of Tokyo-Mitsubishi UFJ strategist Derek Halpenny said expectations the Fed would raise rates only gradually was helping market sentiment and providing support to riskier currencies like the Aussie. "The forward guidance message in terms of two rate increases this year rather than four is certainly helping broader market stability," he said. "The markets seem more content with the idea of a rate increase in June or July and the other not coming until December."
Societe Generale macro strategist Kit Juckes, however, said he did not expect the Fed to raise rates in either June or July, but the fundamentals - economic and policy divergence between the United States and other major economies - signalled further dollar strength. "The question for me here is whether the dollar can carry on rallying on the prospect of the Fed raising rates faster over the next 18 months than is priced in, as opposed to rallying only on expectations of a move in June or July," he said.
The dollar index, which measures the greenback against a basket of six major peers, rose 0.1 percent on Tuesday to 95.627 , close to the previous day's two-month high of 95.968 and putting the dollar on track for its best month since November. Against the yen, the dollar rose towards a one-month high, trading up 0.1 percent on the day at 111.16 yen. If US payrolls due on Friday show solid job growth and if Yellen signals a rate increase in her speech the following Monday, the dollar could break above the previous April peaks close to 112 yen, said Koichi Takamatsu, manager of forex at Nomura Securities.