U.S. Dollar gains as China wanes

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(Bloomberg) -- China’s faltering economy is enhancing the U.S. Dollar’s allure as a growth asset, driving the greenback to maintain gains that have taken it to its strongest in at least a decade.

The dollar climbed versus South Korea’s currency after China on Sunday reported exports and imports that contracted more than economists forecast. Chinese data on inflation, retail sales and industrial output are due this week. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, surged the most since March on Friday amid speculation the Federal Reserve will lift interest rates next month.

“There’s certainly more room for the U.S. dollar to rally with the market only pricing a 70 percent chance of a rate hike in December by the Fed,” said Joseph Capurso, a Sydney-based strategist at Commonwealth Bank of Australia. “Further weakness in the Chinese data would undermine the commodity currencies and emerging market Asian currencies in coming months.”

The Bloomberg Dollar Spot Index was little changed at 1,231.87 as of 11:46 a.m. in Tokyo after climbing 1.1 percent on Friday, the most since March 19. The greenback climbed 0.2 percent to 123.41 yen and was up 1 percent at 1,153.70 won.

China Weakness
China’s overseas shipments dropped 6.9 percent in October in dollar terms, the customs administration said Sunday, a bigger decline than estimated by all 31 economists in a Bloomberg survey. Weaker demand for coal, iron and other commodities from declining heavy industries helped push imports down 18.8 percent, leaving a record trade surplus of $61.6 billion.

The Asian nation’s economic outlook contrasts with the U.S.’s. Payrolls in October gained the most this year and exceeded all estimates in a Bloomberg survey of economists. The jobless rate fell to a seven-year low of 5 percent, and average hourly earnings over the past 12 months climbed by the most since 2009.

There was a 68 percent probability seen Friday that the Fed will raise its benchmark rate at its December meeting, according to futures data compiled by Bloomberg. That’s up from 56 percent before the jobs report’s release and a 35 percent probability of a December increase on Oct. 27, the day before the Fed concluded its last policy meeting. The calculation assumes the effective fed funds rate averages 0.375 percent after the first increase.

“With the U.S. rate hike on the horizon, a drop in imports puts the focus on the slowdown in the Chinese economy, and falling resources prices or emerging stocks may bolster risk aversion,” Toshiya Yamauchi, a senior analyst in Tokyo at Ueda Harlow Ltd., a margin-trading services provider, wrote in a note to clients. “In that environment, the dollar and yen will be bought.”