Dollar Up As Data Suggests Fed Hawks Will Stay In Control; Yen Fragile

The dollar advanced on Monday after strong consumer spending data pointed to persistent underlying inflation pressure, cooling bets that the U.S. Federal Reserve could signal a slowdown in its aggressive monetary policy tightening campaign.

The greenback moved broadly higher in Asia trade, particularly against the Japanese yen, rising more than 0.5% and pushing above the 148 yen level.

The yen last traded 148.08 per dollar, further pressured by the Bank of Japan's (BOJ) decision to keep ultra-low interest rates on Friday, and BOJ Governor Haruhiko Kuroda's still-dovish comments in the face of rising interest rates elsewhere.

The pound and the euro each declined about 0.1% against the dollar, which has recouped some of last week's losses, after having slid on hopes of a potential Fed change of tack.

"Markets have been kind of expecting a Fed pivot on monetary policy. I think that is too premature, given how resilient the economy has been and particularly how high inflation has been," said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

Data on Friday showed that U.S. consumer spending rose more than expected in September, while underlying inflation pressures continued to bubble.

The Fed is expected to deliver another 75 basis point (bp) rate hike after the conclusion of this week's policy-setting meeting on Wednesday.

Sterling was last 0.12% lower at $1.1600, though was on track for a nearly 4% monthly gain, staging a strong recovery after former British prime minister Liz Truss's economic programme unleashed market turmoil last month.

Investors have since taken succour from the appointment of new prime minister Rishi Sunak, who has pledged to lead the country out of a profound economic crisis.

"Sterling has indeed recovered quite a bit over the past few weeks, and I think a lot of that really reflects an unwind of the previous market turmoil and the easing of UK policy uncertainties," said CBA's Kong.

The euro last bought $0.99535, but was likewise headed for a monthly gain of over 1%, its first since May.

"Euro has also benefited from the recent sharp easing in gas prices, although I doubt that will be sustained," said Kong.

Ahead of another central bank decision this week, the Australian dollar rose 0.09% to $0.6417.

The Reserve Bank of Australia (RBA) 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.

"We expect the RBA Board to stick with a 25 bp rate hike on Tuesday, as we think it's too soon for the Board to reverse the judgment it made at its October meeting about scaling back the size of rate increases," said ANZ analysts.

"But we now look for a follow-up 25 bp in December. Along with a further 75 bp of rate hikes in the first half of 2023, we now have the RBA cash rate peaking at 3.85%."

The kiwi edged 0.1% higher at $0.58215, but was on track for a monthly gain of more than 3%, reversing two straight months of losses.

Against a basket of currencies, the U.S. dollar index firmed at 110.81, pushing some distance away from a one-month trough of 109.53 hit last week.