Currency Volatility Holds One-Month High on Yellen Speculation

  • Futures signal increased chance that Fed raises rates
  • Fed chair scheduled to speak in Jackson Hole on Friday

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A measure of global foreign-currency volatility matched its highest level in almost a month as traders speculated that Federal Reserve Chair Janet Yellen’s speech in two days may give clues on the path of U.S. interest rates.

A gauge of the dollar held a three-day advance after futures traders priced in an increased probability of a rate increase by December. The Fed chief is slated to speak Friday at the annual monetary-policy symposium in Jackson Hole, Wyoming. The next Fed policy decision will be announced Sept. 21.

“We have a nervous market waiting for catalysts this week, and then Sept. 21,” said John Hardy, the Hellerup, Denmark-based head of foreign-exchange strategy at Saxo Bank A/S. That has created “an easy squeeze situation for the most crowded positions -- like short pound,” he said, referring to the possibility that traders who bet on the U.K. currency falling versus the dollar may have to rush to end those short positions should Yellen’s remarks push the greenback higher.

The JPMorgan Chase & Co. gauge of currency price swings was at 10.22 as of 7:11 a.m. in New York, matching the highest since July 26 on a closing-market basis. The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, held a three-day, 0.7 percent gain. The U.S. currency strengthened 0.3 percent to $1.1276 per euro and was little changed at 100.25 yen.

The probability of a U.S. rate increase next month rose to 28 percent from 24 percent at the start of this week, and the chances by the end of the year grew to 54 percent from 51 percent, according to data compiled by Bloomberg from fed fund futures.

“Yellen has to take a clear hawkish stance to justify sustained dollar strength beyond this weekend,” said Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Bank Ltd. in Singapore. “While we expect the dollar to rebound in coming days, as recently built short-dollar positions are likely to be squared off ahead of the symposium, the currency could weaken again on even a subtle shift in Yellen’s views.”

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