Currencies: Dollar posts second straight monthly gain

The dollar rose for a second straight month in October, indicating the currency’s rally has resumed after seven long months of sideways trading.

The dollar hasn’t risen for two consecutive months since March, when the ICE U.S. Dollar index, a measure of the dollar’s strength against a basket of six rivals, rose to its highest level in 13 years above 100.

The index DXY, -0.31%  rose 0.7% in October to 97.0170 after gaining 0.1% in September.

The euro and the yen, two of the dollar index’s most heavily-weighted constituents, declined by 1.5% and 0.6% in October. The shared currency traded at $1.0994 late Friday in New York, while the dollar traded at ¥120.6820.

The dollar started the month in a weak position after weak economic data and a cautious outlook from the Federal Reserve diminished expectations that the Fed would raise its benchmark interest rate target in 2015.

Market strategists expect higher rates to lead to a stronger dollar by increasing the return on dollar-denominated deposits, making the currency more attractive to foreign investors.

The dollar rallied sharply last week after the October meeting of the Fed’s rate-setting committee, in which policy makers said a December rate increase was still on the table.

A week earlier, European Central Bank President Mario Draghi hinted that the institution would likely expand its quantitative easing program in December, and Chinese policy makers cut the country’s two key interest rates for the second time this year.

The actions of the three central banks suggested that “policy divergence is getting back on track,” said Shaun Osborne, chief FX strategist at Scotiabank.

Monetary policy divergence—the notion that the Fed is on track to tighten monetary conditions while the rest of the world continues to ease—was widely cited as the driver of the dollar’s rally in the second half of 2014 through the first quarter of this year.

The kiwi

The New Zealand dollar—commonly referred to as the kiwi—was the strongest performer among the G-10 currencies this month.

The currency benefited from a rebound in commodity prices and the fact that the Reserve Bank of New Zealand opted not to cut interest rates at its policy meeting earlier this month, said Greg Anderson, global head of FX strategy at BMO Capital Markets.

“For the commodities that New Zealand specializes in—foodstuff commodities—those outperformed base metals and so forth [in October],” Anderson said.

The kiwi NZDUSD, +1.2252%  appreciated by 6% in October to trade at 67.68 U.S. cents.

—Victor Reklaitis contributed to this report

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