Dollar Gains, Paring Worst Slide Since April, as Fed Bets Mount

Citigroup's Elmer: U.S. Dollar to Lose Some Ground
  • Greenback’s Friday gain follows comments by Fed’s Williams
  • Gauge of U.S. currency still headed for weekly decline

The dollar rebounded, paring its longest slump since April, as traders weighed whether a divided Federal Reserve will raise interest rates this year.

The greenback rose against most major counterparts Friday, buoyed by San Francisco Fed President John Williams’s comment that September is “in play.” The advance trimmed the Bloomberg dollar index’s first back-to-back weekly declines in four months. The remarks left the odds of a Fed hike this year at little better than a coin toss, signaling traders remain skeptical that U.S. policy will diverge further in coming months from Japan and Europe, where central banks are adding stimulus.

“The Fed has signaled it is unwilling to let tightening expectations fall much further,” Valentin Marinov, head of Group-of-10 foreign-exchange strategy at Credit Agricole SA in London, said in a note. “Against this backdrop, the U.S. dollar sell-off should be coming to an end.”

Bloomberg’s Dollar Spot Index, which tracks the currency against 10 peers, rose 0.4 percent as of about 5 p.m. in New York.

The dollar strengthened 0.3 percent to 100.22 yen. It still posted its fourth weekly loss against Japan’s currency, the longest streak since June 2013. It gained 0.3 percent to $1.1325 versus the euro, paring its decline this week to 1.4 percent.

Fed Rhetoric

The dollar has been whipsawed this week as Fed members have been unable to convince traders that a rate increase is imminent. Minutes from the Federal Open Market Committee’s July meeting, released Wednesday, showed officials were divided, while New York Fed President William Dudley indicated policy makers could raise rates as early as next month.

Hedge funds and other money managers reduced net-bullish wagers on the dollar for the second straight week, according to data from the Commodity Futures Trading Commission. Bets that the dollar will rise outnumbered bearish positions by 125,117 in the week to Aug. 16, down from 144,268 a week earlier.

Williams, who called for a major rethink of fiscal and monetary policy earlier this week, said in a speech Thursday that the economy was strong enough for another rate increase soon, after liftoff from near zero in December.

“The Fed, at least in speeches this week, have been trying to get markets more in line with what they expect from monetary tightening this year,” said Richard Falkenhall, a strategist at SEB AB in Stockholm. “But the market is still not convinced.”

The probability of a U.S. rate increase next month is 24 percent, according to Bloomberg calculations based on futures. The chances of a boost by year-end are about 52 percent, up from 42 percent a week ago. The next key policy signal will come when Fed Chair Janet Yellen speaks Aug. 26 in Jackson Hole, Wyoming.

“Today is probably just a blip in the dollar’s lousy August so far,” said Sean Callow, a senior foreign-exchange strategist at Westpac Banking Corp. in Sydney.

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