Bets on hawkish Fed lift dollar, U.S. bond yields

American dollar notes are displayed in this photo illustration in Johannesburg August 13, 2014. REUTERS/Siphiwe Sibeko

By Richard Leong

NEW YORK (Reuters) – The U.S. dollar ended higher for a ninth straight week against the euro on Friday and hit six-year highs against the yen, helped by speculation the Federal Reserve may strike a more hawkish tone when it meets next week.

A recent string of improving U.S. economic data has raised expectations the Fed may act sooner to raise interest rates, a move most investors expect will begin next year.

U.S. retail sales data on Friday that showed spending rose broadly in August added to those expectations, while consumer sentiment hit a 14-month high.

“The general message on the economy is that it’s improving, but we still have a lot of slack to take up,” said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

U.S. Treasury debt yields also rose on Friday, with benchmark yields posting their biggest weekly increase in over a year, helping to make the dollar a more attractive investment.

The benchmark 10-year U.S. Treasury note was down 20/32, the yield at 2.605 percent.

As currency markets made sizable moves this week, major stock markets worldwide pulled back from recent peaks on profit-taking and jitters about the effect of higher U.S. borrowing costs on the global economy.

U.S. stocks fell as energy shares extended their recent slide, while rising bond yields drove down high-dividend-paying shares. Major U.S. indexes finished lower after five straight weeks of gains.

“What’s been creeping into investors’ minds is the inevitability of the Fed raising rates and whether they’re going to do it sooner rather than later,” said Bruce Zaro, chief technical strategist, Delta Global Asset Management in Boston.

The Dow Jones industrial average .DJI fell 61.49 points, or 0.36 percent, to 16,987.51, the S&P 500 .SPX lost 11.91 points, or 0.6 percent, to 1,985.54 and the Nasdaq Composite .IXIC dropped 24.21 points, or 0.53 percent, to 4,567.60.

For the week, the Dow was down 0.9 percent, the S&P 500 was down 1.1 percent and the Nasdaq was down 0.3 percent.

The S&P energy index (.SPNY) fell 1.5 percent and was among the day’s worst-performing sectors as U.S. oil prices shed 0.6 percent. The energy group was down 3.7 percent for the week.

Shares of Exxon Mobil Corp (XOM.N) retreated 1.3 percent on the day, while ConocoPhillips (COP.N) fell 1.2 percent. Crude oil prices fell on pressure from weak demand, ample supplies and the strong dollar.

U.K. equities also finished slightly lower, with investors refraining from making strong bets on stocks before Scotland’s referendum on independence.

The FTSEurofirst 300 (.FTEU3) index of top European shares ended 0.1 percent lower at 1,382.98.

Germany’s DAX (.GDAXI), closed down 0.4 percent after the United States and the European Union tightened sanctions on Russia over its intervention in Ukraine.

Germany imports a significant amount of gas from Russia and sold Russia about 36 billion euros ($47 billion) of goods last year, almost a third of the EU’s total. Some 6,200 German firms are in Russia, with 20 billion euros of investment.

The MSCI world equity index , which tracks shares in 45 nations, slipped 0.46 percent to 426.17.

Gold prices hit 7-1/2 month lows on a strengthening dollar. Spot gold fell 1 percent to $1,228.13 an ounce.

“We do seem to have reached a tipping point both on expectations for (U.S.) interest rate rises next year and the dollar,” said Simon Derrick, head of currency research at Bank of New York Mellon in London.

The dollar index(.DXY), a measure of the greenback’s value against a basket of six major currencies, was down 0.15 percent for the day at 84.17, but still on course for its longest streak of weekly gains since the first quarter of 1997.

A 2.0 percent rise on the week also took the U.S. currency to a six-year high of 107.39 yen. The euro stabilized after four weeks of losses, ending around $1.2964.

The British pound recovered a little ground after the latest polls showed next Thursday’s Scottish referendum vote as too close to call. Sterling ended around $1.6266, above a 10-month low of $1.6051 set on Wednesday.