Volatile Trading Rules Dollar as Fed Weighs Rate-Increase Timing

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Investors should get used to the jump in foreign-exchange market volatility that’s seen the dollar erase all its gains following last week’s jobs report.

Measures of short-term price swings by the greenback versus currencies from eight of its Group-of-10 nation peers have overtaken longer-term gauges, signaling traders are preparing for wider price swings as they await a clear catalyst to buy or sell the U.S. dollar. The U.S. currency is fluctuating as investors speculate on the timing of the Federal Reserve’s first increase in borrowing costs since 2006.

“There still are these differences with regards to the outlook for policy, but there is more uneven or volatile movement in the currency markets,” said Eric Viloria, a strategist at Wells Fargo & Co. in New York. “It makes sense that there’s more uncertainty in the near term and then longer out that there would be less uncertainty once policy begins to normalize.”

Three-month volatility for euro-dollar rose to 11.8 percent, as of 5 p.m. in New York, exceeding a one-year measure by the most in a more than a month.

The dollar was little changed at $1.1283 per euro, after weakening 1.6 percent on Monday. It slipped 0.1 percent to 124.34 yen after reaching 125.86 on June 5, the highest level since June 2002.

Price Swings

The U.S. currency jumped 1.1 percent on June 5 after the better-than-projected jobs report, only to tumble by more than that on Monday as a French official told reporters U.S. President Barack Obama said at the Group-of-Seven summit that dollar strength could be a problem. The currency continued to slide even as Obama denied he made that comment.

“People are waiting for the next big leg or the next big trend,” said Elsa Lignos, a senior currency strategist at Royal Bank of Canada’s RBC Capital Markets unit in New York. If, at their June meeting, Fed policy makers “emphasize too much data dependency and short-term sensitivity to data, then that’s the kind of thing that increases volatility.”

The Federal Reserve is scrutinizing incoming reports for signs the U.S. economy can withstand higher borrowing costs. A retail sales report on June 11 is forecast to show consumer demand recovering after little change in April.

“We’ll have to wait until we get real top-tier fundamental data coming out later in the week as well as central banks and that will really give the market more direction and conviction,” said Eimear Daly, a currency strategist at Standard Chartered Plc in London.

The dollar is the best performer in the past 12 months against a basket of peers tracked by Bloomberg Correlation-Weighted Indexes, gaining 17 percent. The currency has pared those gains in the past three months, slipping 2.5 percent.

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