Dollar climbs as case for US rate hikes firms

The dollar started the week firmly on Monday, with a strong US labour market reinforcing bets on higher interest rates as traders braced for data expected to show stubbornly high inflation.

US unemployment unexpectedly fell last month, Friday figures showed, and inflation data due on Thursday is forecast to show headline inflation at a hot 8.1% year-on-year. Policymakers' preferred core inflation is seen rising to 6.5%.

Westpac strategist Sean Callow said the data and rising yields in response was a "robust combination for the dollar."

"It's further evidence that the US economy is not cratering," he said. "It just feeds into the notion that the Fed is going to spend the next three weeks saying the same thing about interest rates."

Climbing oil prices and geopolitical tension also provided plenty of reasons for nervousness about growth, weighing on energy-importer currencies in Europe and even on exporters such as the growth-sensitive Australian dollar.

The Aussie  fell 0.3% to a 2-1/2 year low of $0.6347 in early trade in Asia that was thinned by a holiday in Japan. Sterling fell 0.2% to $1.1071, while the yen was drifting into a zone on the weaker side of 145 per dollar that prompted authorities' intervention to support it last month.

The yen was last at 145.37 per dollar. The New Zealand dollar touched a two-week low of $0.5593.

Futures pricing suggests traders see a nearly 90% chance of a 75 basis point rate hike in the United States next month and more than 150 bps of tightening by May. Ten-year Treasury yields rose for a tenth straight week last week. 

Benchmark Brent crude futures jumped more than 11% last week after the Saudi-led production cartel agreed to cut supply, while intensifying war in Ukraine is also a threat to Europe's energy security as winter approaches.

The euro fell below $0.98 on Friday and was last at $0.9733. The U.S. dollar index was steady at 112.83, off lows around 110 last week and creeping back toward last month's 20-year high of 114.78.

Markets were waiting to see how the Kremlin might respond to a blast that hit Russia's only bridge to Crimea. Nuclear-armed North Korea made a seventh recent missile test over the weekend.   

Chinese markets reopen after a week-long holiday, and ahead of that the offshore yuan <CNH=D3> was steady at 7.1310 per dollar. The Communist Party's 20th National Congress opens on Sunday and is expected to reaffirm Xi Jinping's leadership.

Services activity in China shrank for the first time since May in September, disappointing expectations.

"The yuan will likely trade between 7.0 and 7.2 in the near term," said Scotiabank strategist Qi Gao.