Fed expectations buoy dollar after Wednesday selloff

John Phillips | Digital Editor | CNBC

The dollar rose on Thursday as markets refocused on an expected interest rate increase from the Federal Reserve and pushed the greenback up from one-month lows against the euro and yen.

The dollar regained part of Wednesday's losses of more than 1 percent, which came after comments on Tuesday from the European Central Bank's Ewald Nowotny that added to doubts about further policy divergence between the United States and Europe.

Markets were largely expecting the Fed to tighten monetary policy and the ECB to ease this month, and while the European bank did reduce its deposit interest rate, the cut was below expectations. Nowotny's comments extended fears the ECB may not take further action.

As uncertainty has grown that the European leg of policy divergence may not come to pass, markets remain overwhelmingly convinced the Fed will raise rates at its Dec. 15-16 meeting, helping the dollar stay further losses.

"You are seeing people become more convinced that the Fed is going to move on autopilot," said Karl Schamotta, director of FX strategy and structured products at Cambridge Mercantile Group in Toronto.

"Therefore you are seeing a unidirectional pattern in the market. A lot of the flurry that happened yesterday is percolating out of the market."

Fed fund futures show markets believe there is an 85 percent chance the Fed will raise rates next week. A recent Reuters poll showed that all but one of 18 brokerages that deal directly with the Fed expect a rate increase.

The dollar index, which measures the greenback against six major rivals, rose 0.63 percent, to 97.95.

The euro fell 0.75 percent against the dollar to $1.093. The dollar 0.03 percent higher against the yen.

The Australian dollar reached a high of $0.7333, helped by a robust jobs report, pulling it away from the previous day's two-week low of $0.7169. It last stood at $0.7287, down 0.21 percent on the day.

The New Zealand dollar rallied after the Reserve Bank of New Zealand cut interest rates but said further easing should not be needed.

The kiwi touched a high of $0.6782, more than 2 full U.S. cents above the previous day's low of $0.6562. It was last down 0.23 percent at $0.675.

The Swiss franc also rose against the dollar after Switzerland's central bank kept interest rates on hold at record lows, defying some expectations that it might act to weaken what analysts see as an over-valued currency.