Dollar up as dealers bet on US rate rise

The dollar hit its highest levels this year against the euro, yen and Swiss franc yesterday as it continued to gain ground on speculation that US interest rates are set for their first rise in four years.

The dollar hit its highest levels this year against the euro, yen and Swiss franc yesterday as it continued to gain ground on speculation that US interest rates are set for their first rise in four years.

But sterling continued to appreciate against the euro, hitting a fresh one-year high and creating more headaches for manufacturers and for the Bank of England.

Traders on Wall Street are betting that tomorrow's key labour market data will show the US economy created the largest number of jobs last month for more than three years. The speculation was triggered by a bigger-than-expected rise in employment in Monday's manufacturing survey.

On Tuesday the dollar surged more than two cents against the pound and the euro and yesterday it rose as high as $1.2057 against the single currency. "Today we are seeing the carry-on from the trend we saw yesterday," said Mitul Kotecha at Credit Agricole. The rise in the dollar sent ripples through the markets, knocking the price of gold, industrial metals and oil as investors rushed to pick up dollars. Copper futures had their biggest one-day decline in seven years, gold tumbled below $390 to a four-month low while the oil price shed more than a dollar. Stocks and bonds on Wall Street also eased back.

However, the currency showed little reaction to the ISM service sector report yesterday that showed a larger-than-expected slowdown in growth last month. The employment index fell, signalling that services created fewer jobs than in January and failing to echo the strong job creation number in Monday's manufacturing survey.

Lauren Germain, at Banc of America Securities, said: "People are not ready to sell the dollar after the moves of the past two days, but it is not a foregone conclusion that employment is going to be positive all the time."