The dollar was firmer against its major peers on Thursday after minutes from the US Federal Reserve's September meeting affirmed expectations that the central bank is likely to continue raising interest rates this year. The minutes from the Fed's September 25-26 meeting showed every Fed policymaker backed raising interest rates and also generally agreed borrowing costs were set to rise further, despite US President Donald Trump's view that the tightenings have already gone too far.
Interest rate futures are now pricing in an 83 percent likelihood that the Fed raises rates in December, according to the CME Group's FedWatch Tool, the fourth hike this year. Two more increases are expected next year. The dollar index, which measures its value against six major peers, traded at 95.65, up 0.08 percent on Thursday.
"The dollar is being bid as there is follow through support post the release of the FOMC minutes," said Ray Attrill, head of currency strategy at NAB. "Dollar bulls are playing to the view that the market is under-pricing what the US Fed can do," added Attrill.
US benchmark 10-year treasury yields climbed to 3.21 percent on Thursday, on increasing rate hike expectations. The last time they traded below the psychologically important 3 percent level was on September 18. Market focus is also trained on Rome, where the Italian government is headed for a showdown with Brussels over Italy's insistence on pushing through a budget deficit target of 2.4 percent of GDP, wider than its previous target of 1.9 percent.
Italy's draft budget for next year, which boosts welfare spending, cuts the retirement age and hikes deficit spending, could breach European Union's fiscal rules that require Rome to lower its large public debt. The blowout has sparked investor concerns about more political tensions in the euro zone between Brussels and the common currency's member states.
The euro changed hands at $1.1497 on Thursday, trading flat versus the greenback, after losing 0.65 percent on Wednesday. The euro has lost 2.73 percent versus the dollar over the last three weeks. "As things stand, Italy is likely to further dampen sentiment in the single market before the first steps towards a compromise are in sight. Our end-2018 target for euro remains at 1.12," said Philip Wee, FX strategist at DBS in a note. The British pound lost 0.12 percent versus the dollar on Thursday to $1.3096, weakening after EU's chief Brexit negotiator Michel Barnier's comments that more time was needed to secure an exit deal for Britain.
The Canadian dollar changed hands at 1.3040, with the dollar gaining 0.2 percent versus the loonie on Thursday. The greenback has risen 1.6 percent versus the Canadian dollar over the past twelve trading sessions. The yen changed hands at 112.53 to the dollar on Thursday, as the dollar weakened 0.12 percent versus the Japanese currency. The yen weakened to its lowest level in six days earlier, hitting a low of 112.72 on Thursday.
The Australian dollar changed hands at $0.7128 on Thursday, gaining 0.3 percent versus the greenback on the back of a strong unemployment report. The Aussie hit a two-year low of $0.7039 on October 5 and analysts still expect the currency to remain under pressure.
"The combination of a strengthening US dollar and commodity price pressures could bring a test of the two-year low around $0.7040 in the coming sessions," said Sydney based Michael McCarthy, chief market strategist at CMC Markets. Elsewhere, in a document keenly awaited by markets, the US Treasury Department's semi-annual currency report, released on Wednesday, did not name China or any other trading partner as a currency manipulator.
"The fact that they refrained from labelling China a currency manipulator is a positive development, especially from the point of view of emerging market currencies," said Attrill.