Dollar Climbs From Three-Month Low as Fed Rate-Hike Odds Rise

Fed Officials Divided Over Need for a Rate Hike
  • Hawkish Dudley comments made ‘huge difference’: Deutsche Bank
  • Rate-hike odds rise above 50% as traders await Fed minutes

The dollar rebounded from a more than three-month low after Federal Reserve officials suggested markets are underestimating the likelihood of higher U.S. interest rates.

The Bloomberg Dollar Spot Index halted a three-day slide as the probability of the U.S. boosting rates by December climbed beyond 50 percent. New York Fed President William Dudley and Atlanta Fed President Dennis Lockhart indicated policy makers might lift borrowing costs as soon as next month. The U.S. currency pared gains after minutes from the Federal Open Market Committee’s July meeting were released.

“If the markets continue to reprice the Fed, there should be a renewed strength in the dollar and weakness in most other currencies,” said Vassili Serebriakov, foreign-exchange strategist at Credit Agricole CIB in New York. “This year, the dollar tends to rally after every minutes release so it could be a positive event for the dollar, especially after Dudley put the markets on alert.”

An optimistic Fed assessment may help the dollar rebound from a slump of almost 5 percent this year by reviving expectations that U.S. monetary policy will further diverge from that of the Bank of Japan and the European Central Bank, which are adding stimulus to spur economic growth.

A Bloomberg gauge of the dollar versus 10 peers rose 0.2 percent as of 2:04 p.m. in New York. The greenback was little changed at $1.1294 per euro and 100.15 yen.

September Live?

Dudley, who serves as vice chairman of the rate-setting Federal Open Market Committee, made his comments Tuesday on Fox Business Network. Lockhart, who doesn’t vote on rates this year, told reporters in Knoxville, Tennessee, that the strength of the economy might justify one or two increases in 2016, with the first possibly in September.

“These hawkish comments made a huge difference,” said Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank AG, in an interview on Bloomberg Television.

Futures contracts show about a 52 percent likelihood of an increase by December, versus 44 percent a month ago. The FOMC left rates unchanged last month, but said in a post-meeting statement that “near-term risks to the economic outlook have diminished.”

Data show a mixed picture of the economy. While a stronger-than-forecast labor report this month stoked optimism, stagnant retail-sales data last week fed some skepticism over the outlook.

Watch Next: The Two Main Points to Look for in Fed's Minutes

“Given that the Fed has over-hyped Fed hike risks in the past, the market must be de-sensitized to these sorts of warnings,” said Steven Barrow, head of currency strategy at Standard Bank Group Ltd. in London. “The data will indeed dictate the pace and extent of tightening and, at the moment, it seems to be saying that two rate hikes this year, after none so far, is a bit far-fetched.”

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