Dollar Holds at Two-Month High Versus Euro on Fed Speculation

How Much Further Will the Dollar Rally?
  • Futures show 54% chance U.S. interest rates will rise by July
  • Volatility for G-7 currencies slows to least in two months

The dollar remained near a two-month high against the euro as traders boosted wagers that U.S. interest rates will rise, starting as early as next month.

The greenback strengthened versus most of its major peers Tuesday after Federal Reserve Bank of Philadelphia President Patrick Harker said Monday he could see two to three rate increases this year, echoing remarks by the San Francisco Fed Bank’s John Williams. Futures are indicating for the first time since March a better-than 50 percent chance that the Federal Open Market Committee will raise rates by its July meeting.

The U.S. currency is getting a boost as officials talk up the possibility of tighter policy, reigniting speculation that dollar-denominated assets will benefit from policy divergence with central banks in other parts of the world that are either extending or maintaining monetary stimulus. Futures trading signals a 45 percent chance of a deposit-rate cut by the European Central Bank this year.

“We are seeing dollar strength coming back as the market increases their expectations for the possibility of a Fed June or July rate hike,” said Eimear Daly, a currency strategist in London at Standard Chartered Plc. “The market is really clinging onto their belief of monetary policy divergence.”

The dollar was little changed at $1.1142 per euro as of 7:49 a.m. in Tokyo from Tuesday, when it reached the strongest level since March 16. It was unchanged at 109.99 yen. The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, slipped less than 0.1 percent.

Slide Stutters

Volatility for Group-of-Seven nations’ currencies slumped to its lowest in two months, a JPMorgan Chase & Co. gauge shows.

The currency’s gains follow the greenback’s most prolonged slump since 2013. The dollar sank more than 8 percent from mid-January through early May, prompting analysts and investors to question whether the divergence trade had run its course.

With Fed speakers increasingly signaling a hike in the next few months, that trade has reignited.

“The Fed is on the cusp of raising rates for the second time in six months, and it’s under-priced in markets,” said Richard Benson, managing director and co-head of portfolio investment in London at Millennium Global Investments, which manages about $16 billion. Benson favors the dollar versus the euro and the yen.

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