LONDON: The dollar edged back towards a five-week high against a basket of major currencies on Monday, as investors eyed U.S. payrolls numbers and Chinese data later in the week for confirmation of bets the Federal Reserve will hike interest rates this year.
The dollar index hit its highest since late August on Friday after Fed Chair Janet Yellen said she expected to begin raising rates later in 2015, as long as inflation remained stable and the U.S. economy was strong enough to boost employment.
Clues on whether the U.S. employment market is indeed growing strongly will come on Friday, when non-farm payrolls data is released. An upbeat report would strengthen the case for a rate hike this year, strategists said.
"Yellen last week was really quite significant - she was very firmly reiterating that she expects to go this year," said BNP Paribas FX strategist Sam Lynton-Brown in London.
"We have this environment where the market is quite flat in its dollar longs, the rates market is only pricing in a 40 percent probability of the Fed going this year, but we think they will hike in December, so we think there's a lot of dollar upside from here."
Speculators have cut bullish bets on the U.S. dollar in the week ended Sept. 22 to their lowest since late July last year, according to data from the Commodity Futures Trading Commission released on Friday. Analysts said if the U.S. jobs report was a solid one, speculators will once again initiate favourable positions, giving a boost to the dollar.
The dollar index was 0.2 percent up on Monday at 96.328, just shy of Friday's high of 96.70, while the euro was down 0.2 percent at $1.1174.
BNP Paribas' Lynton-Brown said a vote in Catalonia that saw secessionists win a majority of regional parliamentary seats would have little impact on the euro. If investors wished to express a view on Spanish politics, they were likely to do so through other asset classes, such as government bonds, he said.
Thursday's China Caixin Purchasing Managers' Index (PMI), however, will be more closely watched than usual by currency traders, who reckon a sharply slowing Chinese economy could delay Fed rate hikes.
"We have two big events this week. Chinese data now seems to be classified in the payrolls category of events," said Mitul Kotecha, head of Asia-Pacific FX strategy for Barclays in Singapore. "There's (a) reason not to be doing anything until you see these two big numbers."
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