Dollar Rally Longest Since January on Fed Rate-Move Speculation

  • Odds of June hike are now 28 percent from 4 percent Monday
  • Dudley says next FOMC meeting live, Lacker sees hiking case

What Influences Could Impact Fed's Rate Hike Decision?

The dollar was set to strengthen against developed-market peers for a third week, the longest streak of gains since January, on speculation the Federal Reserve will raise interest rates as early as next month.

The U.S. currency strengthened versus most of its Group of 10 counterparts Thursday after New York Fed President William Dudley said June was a live meeting and Richmond Fed President Jeffrey Lacker said the case for hiking would likely be “very strong.” Emerging-market currencies slumped as higher U.S. rates diminish the relative appeal of these assets.

“Markets have been repricing expectations of a rate hike this year, the shift in expectations has been supportive of the dollar," said Eric Viloria, a New York-based strategist at Wells Fargo & Co. “But expectations can change rather quickly. The Fed’s still data dependent: It’ll take continued improvement in data before we expect the Fed to raise rates."

The U.S. currency extended its rebound from an almost one-year low reached earlier this month, with signs of stronger economic performance adding to evidence that may convince the Fed to tighten policy. That bolsters the relative allure of the dollar as policy makers in Europe and Japan pursue negative interest rates and aggressive bond-buying to spur growth and inflation. 

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 major counterparts, was little changed as of 8:15 a.m. in Tokyo Friday, after closing at the highest level since March 28. It has gained 0.8 percent this week and 3.2 percent since April 29.

June Bug

The dollar jumped 0.9 percent against the euro and 1 percent versus the yen on Wednesday when minutes of the Fed’s April 26-27 meeting used the word “June” six times in a policy context. That followed several speeches by regional Fed bank presidents warning investors not to dismiss a mid-year move after the odds edged close to zero.

There’s a 28 percent chance the U.S. central bank will boost rates at its June meeting, up from just 4 percent on Monday, according to data compiled by Bloomberg based on fed fund futures. Jeffrey Gundlach, chief executive officer of $95 billion DoubleLine Capital, said the Fed looks like it will be hiking unless the data weakens, a shift from waiting for economy to improve.

Hedge funds reduced bets for the U.S. currency to weaken versus eight other currencies last week, according to the Commodity Futures Trading Commission. After surging more than 20 percent against the euro in the past two years, strategists project the dollar staying near its current level of $1.12 per euro through year-end.

“If we can get a rate hike fully priced in and the dollar doesn’t do much, and the other markets don’t do very much, then perhaps we can deliver,” said Paul Mortimer-Lee, BNP Paribas SA’s chief economist for North America.“I still don’t think they’re going to go in June , that’s our call, but I’m much more nervous than I was.”

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