Fed rate hike view pushes dollar to new highs, despite weak data

By Dion Rabouin

NEW YORK (Reuters) - The dollar hit an eight-month high on Monday, pushed by unusually hawkish comments from a regional U.S. Federal Reserve president over the weekend that helped further cement expectations of an interest rate hike in December.

San Francisco Fed President John Williams on Saturday cited a "strong case" for raising rates when Fed policymakers meet next month, as long as U.S. economic data does not disappoint. Williams, a voting member of the Federal Open Market Committee, also said the Fed could raise rates in the near term, but should do so at a gradual pace.

Williams' reputation as a policy dove made his comments that much more influential, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"For him to acknowledge that there's a strong case for higher rates next month is a strong signal to the market that there's increasing consensus at the Fed that rates are likely to rise next month," he said.

Futures prices showed investors see nearly a 75 percent chance the Fed will hike rates next month, according to CME Group's FedWatch. The prospect of higher interest rates make the greenback a more attractive currency to investors.

Williams' comments and the growing expectation of a rate hike overshadowed Monday's lackluster U.S. manufacturing and housing reports.

Data showed manufacturing sector growth slowed to its weakest pace since October 2013 and existing home sales declined 3.4 percent last month, but both reports continued to support long-term stability in the U.S. economy.

Existing home sales are up 3.9 percent from a year ago, on track to record the best annual sales in eight years. The drop in manufacturing activity was pronounced but remained supportive of the sector expanding at a solid pace.

The dollar index <.DXY>, which measures the greenback against six major currencies, rose as much as 0.4 percent, touching 100.000, an eight-month high not far from this year's peak of 100.390.

The euro fell below $1.06, hitting a new seven-month low against the dollar. It was last down 0.2 percent at $1.0623.

Commodity-linked currencies including the Norwegian crown and Canadian and New Zealand dollars rose briefly after oil prices jumped following a Saudi government briefing note saying the country was ready to cooperate in maintaining stable markets. But those gains were short-lived and all three currencies were down on the day against the U.S. dollar.

Sterling also fell against the dollar, dropping around 0.5 percent to $1.5117.

(Reporting by Dion Rabouin; Editing by Meredith Mazzilli)

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