Dollar Gains Versus Euro as Fed Bolsters Bets on Rate Divergence

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The dollar rose against the euro as minutes from the Federal Reserve’s last meeting bolstered bets the U.S. will tighten monetary policy before central-bank officials in Europe.

The greenback traded close to the highest level in three weeks versus the shared currency as the release showed Fed policy makers expect the American economy to rebound from a first-quarter slowdown, while indicating a June rate increase is unlikely. The gains come after the European Central Bank reaffirmed its commitment to quantitative easing.

“The diverging central bank theme will be a drum that gets progressively louder as we move throughout the summer,” said Jennifer Vail, head of fixed-income research in Portland, Oregon, at U.S. Bank Wealth Management, which manages $126 billion. Vail said she expects to see “modest strength” in the dollar over the next few weeks.

The U.S. currency rose 0.5 percent to $1.1094 per euro as of 5 p.m. in New York. The dollar climbed 0.6 percent to 121.35 yen, touching 121.48, a two-month high.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major trading partners, added 0.1 percent to 1171.98.

June Unlikely

The dollar has rallied against all of its major peers this week after a slew of weaker-than-forecast data prompted a two-month selloff that left the currency near its cheapest in four months.

Investors who pared wagers on the currency to the least since September are now weighing whether the time is right to re-establish those bets.

“These minutes essentially look to confirm the market’s view that a June move is extremely unlikely, but the broader evidence continues to suggest liftoff at some point in 2015,” said Chris Molumphy, the San Mateo, California-based chief investment officer of Franklin Templeton’s fixed-income group. Franklin Templeton oversees about $895 billion in assets.

A strong dollar was one reason some committee members thought recent weakness in economic growth may persist. Should that strength diminish, its influence on investment and net exports would “likely recede,” the minutes state.

Officials repeated that they will raise rates when they have seen further improvement in the labor market and are “reasonably confident” that inflation will move back up toward the Fed’s 2 percent goal.

“They said essentially, ‘look, we don’t have enough data to hike in June,’” Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California, said by phone. “More important for the dollar is they firmly believe the weakness we saw in Q1 is transitory.”

Policy Speeches

Chair Janet Yellen will give traders another chance to gauge the Fed’s rate outlook when she speaks in Providence, Rhode Island, on May 22.

Japan’s central bank starts a two-day policy meeting on Thursday. While economists from Goldman Sachs Group Inc. to Credit Agricole SA delayed their calls on an expansion in the nation’s monetary stimulus, the largest number still sees a boost by the end of October, a survey by Bloomberg shows.

ECB Executive Board member Benoit Coeure said Monday the central bank will bring forward some of its monthly bond purchases before liquidity drops this summer. A day later, his colleague Christian Noyer said officials are ready to extend quantitative easing if needed.

“Divergence is not dead,” Mark McCormick, a foreign-exchange strategist at Credit Agricole SA, said by phone. “The dollar’s really starting to consolidate from the weakness we’ve seen over the past two months.”

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