Dollar Rally Sputters as Caution Rules Traders Parsing Fed Talk

QuickTake: The Currency Wars
  • Momentum indicator shows greenback gains near extended levels
  • Global foreign-exchange volatility slows to a four-month low

The dollar’s rally paused after reaching its strongest level in two months and a momentum indicator headed toward a level some analysts see as a sign the currency has moved too far, too fast.

The greenback weakened versus a measure of 10 major peers even as Federal Reserve policy makers issue public comments on economic growth and inflation reaching levels that merit interest-rate increases this year. The central-bank tightening talk failed to spark price swings as a JPMorgan Chase & Co. measure of global foreign-exchange volatility fell to the least since January.

Traders have bought back into the dollar as officials from the Federal Reserve, including Philadelphia Fed President Patrick Harker and San Francisco’s John Williams, emphasize that the central bank may increase rates as many as three times this year and begin next month. Caution reigns after policy makers’ pro-tightening comments earlier this year quickly gave way to rhetoric on slowing U.S. growth. Hedge funds and other large speculators are the most neutral on the U.S. currency in two years.

“I would chalk it up to a pause, month-end is right around the corner,” said Joe Manimbo, an analyst with Western Union Business Solutions, a unit of Western Union Co., in Washington. “The dollar certainly is on a rosier path given that we’ve seen bullish data and hawkish commentary from a series of Fed officials.”

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 peers, lost 0.2 percent as of 5 p.m. in New York. The currency dropped 0.1 percent to $1.1155 per euro and added 0.2 percent to 110.19 yen.

The dollar gauge’s 14-day relative strength index rose to 66 on Tuesday, nearing the 70 level that indicates an extended move. It fell back to 62 on Wednesday.

Neutral Position

Philadelphia Fed head Harker reiterated on Wednesday that two to three rate increases are possible this year.

Hedge funds reduced wagers against the dollar to a net 10,653 contracts in the week through May 17. That’s the smallest bet on either dollar strength or weakness since June 2014. The outlook for higher interest rates has increased since then, with futures contracts showing a 34 percent probability of a June hike, up from 12 percent a week ago.

“The dollar overall remains in an uptrend, even if that move pauses today,” Kit Juckes, a London-based strategist at Societe Generale SA, wrote in a client note. “There ought to be smiles at the Federal Reserve: so far, so good for their plan to persuade markets to price in a faster pace of rate hikes.”

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