Dollar extends gains on tighter policy hopes

The US dollar extended its run of gains this week as the currency market focused on expectations for a tightening of US Federal Reserve policy this summer.

The euro slid for a third consecutive day on Thursday after minutes from the Federal Reserve's latest policy meeting, along with commentary from several of its officials, indicated a rate increase in June remained on the table despite a weakening of economic data.

The common currency fell 0.7 per cent against the dollar to $1.075 while sterling declined 0.9 per cent to $1.479 versus the greenback, as currency volatility surged with next month's UK election remaining too close to call.

The minutes from the March meeting of the Federal Open Market Committee highlighted caution on the likely pace of future rate increases but also showed how some officials believed an increase in rates could be warranted as soon as June.

''The minutes suggested a greater risk of a June or even a September hike than many investors seem to appreciate,'' said Marc Chandler, head of currency strategy at Brown Brothers Harriman.

Economists at Bank of America added: ''The FOMC minutes reflected more concern about risks but kept June in play while emphasising data dependence and flexibility.''

The dollar index rose as much as 0.6 per cent in morning trading in London, before easing.

At the current level of 98.12, the basket of the dollar versus its main rivals, has rebounded from the low of 96.39, set after last Friday's disappointing US jobs data.

The dollar's recovery this week has come as Fed Funds futures show an uptick in bets that a move in September was possible, although the majority of wagers remain on December.

The divergence in monetary policy between the Federal Reserve, European Central Bank and Bank of Japan has pressured the euro and Japanese yen over the past year, with the former falling by more than a fifth in the preceding 12 months.

The latest FOMC minutes revealed wide ranging views of when the central bank should lift its rates from near zero, with several members on the policy setting committee judging that "the economic data and outlook were likely to warrant beginning normalisation at the June meeting".

The Fed added that others expected that lacklustre inflation should keep the central bank from moving until later in 2015 or perhaps in 2016.

Governor Jerome Powell, speaking in New York on Wednesday, said an increase could come in June and that "monetary policy works with long and variable lags, so rate increases need to begin well before we reach those goals".

Strategists at Societe Generale noted that signs of wage growth - a point scrutinised by the Fed - could bring an earlier rate increase back into view.

"Where rate differentials matter most the dollar is doing well, but the higher-beta currencies are still getting a lift from the positive risk mood that comes from confidence in a very slow pace of Fed tightening when the Fed does finally signal lift-off,'' said the bank.

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