FX Focus: Dollar index hits 14-year high amid increased expectations for Fed rate hike

The index measuring the strength of the dollar against other currencies hit the highest level since 2003, after a prominent Federal Reserve official suggested only "major shocks" could prevent the US central bank from raising interest rates next month.

As a result, the dollar index – which gauges the performance of the US currency against a basket of its main international rivals – hit a 14-year high of 100.52, after St Louis Fed president James Bullard became the latest to back a rate hike in December.

Speaking in London, Bullard said that barring any drastic changes in the economic environment, a single rate increase would be enough to move monetary policy to a "neutral setting".

The prospect of a rate hike being only a few weeks away saw the dollar gain against its major rivals. The greenback was 0.12% and 0.16% higher against the euro and the yen, trading at 0.9336 euro cents and ¥109.38 respectively, while it also gained against the Swiss franc to CHF1.0033.

The US currency was also firmly on the front foot against its Australian and Canadian counterparts, gaining 1.01% and 0.18% to trade at AUD$1.3385 and CAD$1.3472 respectively.

"The strength in the dollar index does represent a risk for the emerging markets and it can also eat into corporate profit for the US firms," said Naeem Aslam, chief market analyst at Think Markets UK.

"The current move is also massively backed by bets that the Fed is going to raise the interest rate and odds are standing at 94%. It is important to keep in mind that come in December, it is the tone of the Fed for the future trajectory of the interest rate hike which is going to impact the dollar."

Meanwhile, the pound edged slightly lower against the dollar, after the number of people signing on for unemployment benefit was far greater than analysts expected.

Sterling was down 0.18% against the greenback, trading at $1.2432, but was broadly flat against the euro, exchanging hands at €1.1609.

According to data released by the Office for National Statistics (ONS), the claimant count rose by 9,800 in October, its highest level in four years, compared with analysts' forecast for an increase of approximately 2,000. Meanwhile, September's number was revised up to show 5,600 people signed on for benefits, rather than the 700 it was first reported.

The unemployment rate fell to its lowest level for 11 years as firms shrugged off the UK's vote to leave the European Union, while average earnings increased but economists said the increase in the claimant numbers was a warning sign.

"The rise in the claimant count change – which is a fairer representation of the current environment as this data point covers the period until the end of last month – takes the shine off the good news at the very least and possibly even usurps it," said XTB.com analyst David Cheetham.