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FOREX-Dollar steadies after three-day fall, Scots rock sterling
March 13, 2017 / 1:28 PM / in 7 months

FOREX-Dollar steadies after three-day fall, Scots rock sterling

* Dollar recovers after start of European trade

* Sterling falls then rises on new Scottish referendum call

* Comments by Belgium’s Smets rows against ECB rate hike talk

* ECB’s Draghi, Lautenschlaeger due to speak later

By Patrick Graham

LONDON, March 13 (Reuters) - The dollar recovered a foothold on Monday after its worst three days of losses since early December, the impact of higher U.S. market interest rates turning it positive on the day against both the euro and a basket of currencies.

Sterling, along with the Canadian dollar the worst major performer of the past fortnight against the greenback, rose almost half a percent after the devolved Scottish government demanded the right to hold a new referendum on independence.

But a gain of 0.2 percent for the dollar put an end to a wave of profit-taking that has taken hold since last Thursday’s policy meeting yielded hints the European Central Bank is starting to think more about how to react to an improving euro zone economy.

Friday’s solid jobs number has still cemented the case for a rise in U.S. Federal Reserve rates this week that will long predate any rise in the European equivalents, and long-term market rates are also far higher.

Belgian central banker Jan Smets also told the Wall Street Journal that the ECB had not taken a first step towards removing stimulus.

“There was also always the chance that once we got a good payrolls number on Friday, the market would take some money off the table and that duly occurred,” said Neil Mellor, a currency strategist with Bank of New York Mellon in London.

“But the fundamentals are still behind the dollar. A lot is priced in but when you have a currency that is outstanding in terms of yield, the sell off was always going to be limited.”

By midday in London, the dollar had recovered half a cent from lows hit in Asian time to trade 0.2 percent higher on the day at $1.0657. The dollar index was also 0.1 percent higher on the day at 101.36, some way off highs above 102 hit a week ago.

In a week expected to see Britain formally lodge its request to leave the European Union, sterling initially fell on Scottish First Minister Nicola Sturgeon’s call for a new referendum on independence.

But her timing of it - at earliest the end of next year, when Brexit negotiations are expected to be concluded - headed off the chance of another big political risk being added to what may prove a turbulent 12 months.

“Sturgeon in the end did not say anything that changed what we had assumed would happen sooner or later,” said a dealer with one bank in London.

“The worry was they would push for it to happen immediately. That said, there is so much political risk in the next few months and the economy does not look as ready as it did to ride it all out.”

For the dollar, Fed fund futures prices show investors price in more than a 90 percent chance of an increase in official U.S. interest rates on Wednesday and the market’s attention is now firmly on the scale of tightening further out.

Money market pricing is still stuck at three quarter-point rises this year. If the Fed can continue to move every three months, it will deliver four, and any rise in conviction on that scenario should boost the dollar.

“If the economic outlook evolves in line with our economists’ expectations, we are likely to see the Fed members guide the markets towards a faster pace of hikes than is being currently discounted over the medium-term,” analysts from Goldman Sachs said in a note. (EEditing by Catherine Evans)

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