Dollar Traders Await Yellen With Best Month in Year Up for Grabs

Fed Won't Raise Rates in June, Here's Why
  • Greenback gains against most major counterparts in May
  • GDP upgrade adds to evidence economy nears Fed’s threshold

Wait and see is the mantra for currency traders weighing whether to buy into the dollar’s best month in more than a year.

With the U.S. currency poised to gain more than 3 percent in May, Federal Reserve Chair Janet Yellen delivers a speech that has the potential to determine the fate of the greenback’s recent rally. A string of central bank officials have signaled their willingness to tighten policy as soon as next month, and any hint that higher interest rates may be delayed threatens to erode the dollar’s advance.

Investors have raised their expectations for U.S. rate increases as central bankers including Philadelphia Fed President Patrick Harker and San Francisco’s John Williams emphasized that the Fed could still tighten monetary policy two or three times by year-end. Strengthening U.S. economic reports, including data showing that gross domestic product expanded faster than previously estimated in the first quarter, have supported their argument that the nation can withstand another hike.

“Any kind of sign that the Fed’s increasing the probability to hike is going to be the main driver of the dollar,” said Fabian Eliasson, head of U.S. corporate foreign-exchange sales in New York at Mizuho Financial Group Inc. That said, “I don’t think you’re going to get any policy direction out of Yellen’s speech.”

The Bloomberg Dollar Spot Index added 0.3 percent as of 11:46 a.m. New York time, after touching the highest level since March earlier this week. The greenback is set for the biggest advance since January 2015, having gained versus most of its major counterparts.

Solid Economy

Evidence is mounting the economy is solid enough to merit Fed action, with a measure of data surprises surging to the highest since the start of last year. U.S. economic data have exceeded analysts’ forecasts, resulting in the highest reading in the Bloomberg Economic Surprise Index since January 2015.

The odds indicated by futures of an interest-rate increase at the Federal Open Market Committee’s June 14-15 meeting rose as high as 34 percent this week, almost tripling this month. Yellen is due to speak at an event in Massachusetts at 1:15 p.m.

“There’s only a 20 percent chance she is going to comment on the economy or the outlook for monetary policy,” said Ned Rumpeltin, European head of foreign-exchange strategy at Toronto Dominion Bank in London. “But that will keep the market on its toes anyway, considering the drumbeat of FOMC members in recent days pointed to the risk of an earlier rate hike. The market will be looking for confirmation that Yellen is in sync with these views.”

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