Dollar Pressured Before Payrolls Shed Light on Fed Rate Path

  • Bloomberg’s dollar index set for first weekly drop since April
  • Yellen has said rate increase warranted ‘in the coming months’

Expect To See More Central Bank Divergence, Says Duret

A gauge of the dollar is set for its first weekly decline since April as traders await a U.S. jobs report Friday that will help determine whether the Federal Reserve will raise interest rates as soon as this month.

Fed Chair Janet Yellen said last week the ongoing improvement in the U.S. economy would warrant another interest-rate increase “in the coming months,” though stopped short of giving an explicit hint that the central bank would act at its June 14-15 meeting. The dollar pared some of its drop Friday after Chicago Fed President Charles Evans said it could be appropriate to raise rates twice this year.

Nonfarm payrolls increased 160,000 for the second straight month in May, according to the median estimate in a Bloomberg survey of economists before the Labor Department report.

“It seems an upside surprise is most clearly dollar-supportive” against low-yielding currencies such as the euro and Swiss franc, said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “We have a risk-appetite comeback to consider and the idea that the market is generally able to withstand measured Fed rate hikes. The most likely scenario is that the June meeting is used as a launching pad for a July move. I don’t expect fireworks going into the” payrolls numbers, he said.

Bloomberg’s Dollar Spot Index, which tracks the currency against 10 major counterparts, was little changed as of 6:43 a.m. New York time. It’s fallen about 0.1 percent this week, set for the first weekly drop since April 29. 

The greenback was little changed at 108.91 yen, heading for a 1.3 percent decline this week. It was at $1.1140 per euro, set for a 0.2 percent weekly drop.

Chicago Fed’s Evans said that he expected “a good jobs number” from the report, though the Verizon strike may have an impact.

“I’m looking for good payroll employment growth,” he said in a Bloomberg Television interview with Anna Edwards in London. “If we were to move in June, that could work, July could work, September could work.”

“I do think that there’s a lot of value to allowing enough time to monitor the situation, especially if you think things might be changing a little bit, so that might be one rationale for holding off,” said Evans, who is a non-voting member of the Federal Open Market Committee.

Fed fund futures prices indicate a 22 percent probability that the Fed will raise interest rates in June and 55 percent odds of a move by July, according to data compiled by Bloomberg.

Brexit Focus

The next focus for markets after the employment data will be Yellen’s June 6 address at the World Affairs Council of Philadelphia for her view on global conditions amid growing concern about the U.K.’s June 23 referendum on whether to remain in the European Union, said Yasuhiro Kaizaki, vice president for global markets at Sumitomo Mitsui Trust Bank Ltd. in New York.

“The payrolls and Yellen’s comments on June 6 will set the tone for the dollar’s next direction,” Kaizaki said. “Markets are focusing on Yellen’s view of the overseas environment, including Brexit. If she brushes aside overseas conditions, then a strong payrolls number may heighten speculation for a June rate hike.”

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