Dollar Rises From Year Low as Fed Speakers Challenge Rate Bets

U.S. Election, Brexit and Other Risks Facing the Dollar
  • Atlanta Fed Chief Lockhart calls June increase `a real option'
  • Payroll report due May 6 forecast to show 200,000 jobs added

A gauge of the dollar rose from its lowest level in a year after two Federal Reserve officials said an interest-rate increase could be considered next month.

The greenback has climbed against its 16 major peers since Monday’s close as Atlanta Fed President Dennis Lockhart called a June rate increase “a real option,” while San Francisco’s John Williams said he would support such a move at the next meeting provided the U.S. economy stayed on track. Both officials are non-voting members of the Federal Open Market Committee. Policy makers including St. Louis Fed chief James Bullard are due to speak this week. The yen fell versus the dollar amid speculation the Japanese currency’s surge to an 18-month high was too rapid.

The dollar has gained versus major peers since Monday
The dollar has gained versus major peers since Monday

“The big question hanging over the market this year is whether or not the Fed is any more wedded to the idea of two rate hikes than it was to the idea of four rate hikes back in December,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “Any sense that there’s a new thought process permeating through the Fed system will impact on the price action because you have a very jumpy market.”

Dollar Gains

Bloomberg’s Dollar Spot Index, which tracks the currency again 10 major peers, rose 0.4 percent as of 6:58 a.m. New York time, and has climbed about 1.6 percent from a one-year low reached on Tuesday. The greenback gained 0.2 percent to 106.76 yen, advancing from the 105.55 level touched Tuesday that was its weakest since October 2014. It strengthened 0.1 percent to $1.1484 per euro.

Even with neither of the officials who spoke yesterday having a vote on the FOMC this year, the dollar’s reaction “just shows how sensitive the market is” about Fed’s potential moves, Mellor said.

The dollar has struggled in recent months as traders scaled back expectations for the Fed to raise rates. Futures contracts show just a 12 percent likelihood of an increase in June, and a 55 percent probability by December. The calculation assumes the effective fed-funds rate will average 0.625 percent after the central bank’s next increase.

‘Hawkish’ Fed

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“Euro-dollar was in overbought territory using either rate spreads or oil as a predictor and the dollar-yen slide looked overdone, despite no action by the Bank of Japan,” said Stuart Bennett, head of Group-of-10 currency strategy in London at Banco Santander SA. “Add that to ‘hawkish’ Fed rhetoric and you get a correction.”

Europe’s shared currency climbed above $1.16 Tuesday for the first time since August.

Data due Wednesday include a private payrolls report from the ADP Research Institute, factory orders, Markit Economics’ services output -- based on a survey of purchasing managers -- and ISM’s non-manufacturing index. Analysts predict the Labor Department’s monthly employment report scheduled for release May 6 will show employers added 200,000 jobs in April, according to a Bloomberg survey.

“The data is not necessarily a game changer, but if it disappoints it will be another excuse for a market that is now quite relaxed about being short the dollar, to sell it further,” Santander’s Bennett said, referring to a bet an asset’s price will decline.

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