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Dollar emerges champion with Yellen cementing higher rates path

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(Bloomberg) — A gauge of the dollar headed for its best week in two months after Federal Reserve Chair Janet Yellen reaffirmed she expected the central bank to raise rates this year for the first time in almost a decade.

The U.S currency, the best performer against its nine- developed nation peers in the past month, got a further boost as investors shifted focus to the outlook for U.S. interest rates after concerns over Greece and China receded. The Bloomberg Dollar Spot Index gained on Friday after a report showed annualized consumer prices rose for the first time in six months in June and another showed new-home construction climbed to the second-highest level since November 2007.

Canada’s dollar touched its lowest level since 2009 versus the greenback after the nation’s central bank cut borrowing costs this week.

“There is desire to play interest-rate differentials but not as aggressively,” said Stuart Bennett, London-based head of Group-of-10 currency strategy at Banco Santander SA. “There is a feeling in the market that if they push the dollar too high, then despite what the Fed might be implying, it will have an influence on policy decisions. We are moving back to the dollar is king.”

Bloomberg’s Dollar Spot Index, which tracks the U.S. currency against its 10 major peers, rose 0.1 percent to 1,206.76 as of 8:40 a.m. New York time, the highest since April 13. The gauge has climbed 1.5 percent this week, set for the biggest gain since May 22.

The U.S. currency was little changed at 124.12 yen, about 1.4 percent from the 13-year high of 125.86 reached on June 5.

Policy Divergence

The U.S. consumer-price index climbed 0.3 percent in June after rising 0.4 percent in May, a Labor Department report showed Friday in Washington. That matched the median forecast of 81 economists surveyed by Bloomberg. Costs over the past 12 months increased for the first time this year.

U.S. housing starts rose 9.8 percent to a 1.17 million annualized rate from a revised 1.07 million in May that was stronger than previously estimated, figures from the Commerce Department showed Friday in Washington.

Yellen told lawmakers on Thursday that waiting too long to raise interest rates holds risks for the U.S. economy, as does tightening too quickly. She said over two days of testimony before Congress that she believes the central bank can raise interest rates in 2015.

ECB Policy

“Yellen’s testimony turned out to be an event to confirm a rate hike this year, keeping the dollar-buying trend,” said Yasuhiro Kaizaki, vice president for global markets at Sumitomo Mitsui Trust Bank Ltd. in New York. “Markets are likely to keep buying the dollar on monetary-policy divergence.”

The euro was little changed to $1.0871, and was about 4 percent from the 12-year low of $1.0458 reached on March 16.

The shared currency fell to the weakest level in almost two months against the dollar Thursday as European Central Bank President Mario Draghi reiterated his commitment to seeing his 1.1-trillion-euro stimulus plan through to its intended end in September 2016. The ECB kept its refinancing rate at a record- low 0.05 percent and the deposit rate at minus 0.2 percent.

Greek lawmakers on Thursday approved new austerity measures that are conditional for a bailout to keep the country in the euro bloc. Since then, euro-area finance ministers agreed in principle to extend a 7 billion-euro bridge loan to Greece, according to an official familiar with the decision. Germany’s parliament will vote on the proposal Friday.

The Canadian dollar weakened 0.3 percent to C$1.2992 against its U.S. counterpart, after touching C$1.3008, the weakest since March 2009.

The Bank of Canada reduced its benchmark interest rate on Wednesday for the second time this year as falling oil prices shrank the economy in the first half.

–With assistance from Chikako Mogi in Tokyo.