Citigroup Survey Points to Headwinds for Dollar on Go-Slow Fed

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  • Investors see one rate hike in 2016, gradual path to follow
  • Greenback down 5 percent after three straight years of gains

Citigroup Inc. said a survey of investors this week shows asset managers are positioning for the Federal Reserve to raise interest rates once this year followed by a slow approach to further monetary tightening, presenting headwinds for the dollar.

The poll of about 350 representatives of hedge funds, institutional investors and others reveals market sentiment as the U.S. currency has weakened this year after three straight annual gains. Foreign-exchange volatility increased Thursday as the greenback traded close to the weakest level since May.

Fed Chair Janet Yellen’s speech Friday on the central bank’s monetary-policy toolkit will be closely watched for clues about the path of U.S. rates. Investors’ sentiment has shifted back and forth in recent weeks on how aggressive the Fed will be in its approach to monetary tightening after it raised borrowing costs in December for the first time since June 2006.

“One hike in December and a very flat path into the distant future -- investors are waiting for confirmation that that’s the intention and nothing worse,” said Steven Englander, global head of Group-of-10 currency strategy at Citigroup in New York. Citigroup topped Euromoney magazine’s 2016 ranking of the world’s largest currency traders.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, fell 0.1 percent as of 5 p.m. in New York. The measure is down 5 percent this year after gaining 9 percent in 2015. The U.S. currency weakened 0.2 percent to $1.1285 per euro and added 0.1 percent to 100.53 yen.

One-month implied volatility for the dollar versus the yen, a measure of anticipated price swings based on options, this week reached the highest level since July 25 on a closing basis. A JPMorgan Chase & Co. gauge of global currency price swings was at 10.18 percent after reaching the highest since July 25 on Wednesday.

Fed Watch

Eighty-five percent of investors surveyed by Citigroup in an online poll see the Fed raising rates in 2016.

“About two-thirds expect an indication of a December hike in the speech, with many more seeing it in a broad dovish context, rather than hawkish,” Citigroup said in the note.

The probability of a U.S. rate increase at the Fed’s next meeting on Sept. 21 rose to 32 percent from 20 percent a week ago, and the chances by the end of the year are 59 percent, according to data compiled by Bloomberg from fed fund futures. Fed Bank of Kansas City President Esther George said the U.S. labor market nearing full employment and inflation rising toward the central bank’s target should prompt higher rates.

“We expect the dollar to continue its recent consolidative pattern heading into tomorrow’s speech from Yellen, the content and tone of which should drive the U.S. dollar’s trend in the week ahead,” Erik Nelson, a currency analyst at Wells Fargo Securities in New York, said in a note.