Dollar Rallies Most Since 2014 as Fed’s Yellen Sees Higher Rates

Yellen: Appropriate for Fed to Increase Rates
  • Chair says economy is poised to handle reduced stimulus
  • Full employment, progress on inflation guide central bank

The dollar extended it largest monthly gain since September 2014 after Federal Reserve Chair Janet Yellen said higher interest rates in the coming months look “appropriate.”

The greenback reached a two-month high after Yellen said in remarks at Harvard University “the economy is continuing to improve” after a weak first quarter. Her comments echoed other regional Fed presidents that said they see interest rates higher as soon as next month, a policy move that increases the relative appeal of the dollar.

"There’s a stronger push among policy makers to persuade the market that they need to think about the risks of rising interest rates," said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto. "The end product of this is we have a marginal new high on the dollar."

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.

The Bloomberg Dollar Spot Index added 0.5 percent as of 5 p.m. New York time, reaching the highest level since March 25. The greenback has advanced 3.6 percent this month, having gained versus all of its major counterparts.

Hedge funds and money managers turned net bullish on the dollar versus eight major peers for the first time in six weeks, according to the Commodity Futures Trading Commission. Bets that the currency will rise outnumbered bearish positions by 67,430 contracts in the week to May 24, compared with net bearish positions of 10,653 the previous week.

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’s brief comments today tell us that her views have evolved, perhaps more than anyone else’s, and that she is willing to contemplate a rate hike soon," Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York, said in an e-mail. "She certainly did not tip her hand with regard to a June move, but, again, she has teed up her June 6 speech for that purpose."

Yellen will address the World Affairs Council of Philadelphia at a luncheon event on June 6.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE