The Buck Stops Listening Until the Fed Walks the Talk on Rates

  • Investors are ‘comfortable’ with U.S. hiking: IG’s Weston
  • Greenback pulling back even as March rate-rise bets mount

By rights, this week should have been a bullish one for the dollar.

Federal Reserve Chair Janet Yellen’s more hawkish tone bumped up bets on a March interest-rate hike, and the steeper-than-forecast increase in U.S. consumer prices -- they rose the most in almost four years in January -- signaled inflation in the world’s largest economy is right where the central bank wants it. Despite all this, the greenback is on track for losses this week versus the Korean won to the Australian dollar and is flat against a basket of its 10 most-traded peers.

According to Chris Weston, chief markets strategist at IG Ltd. in Melbourne, the “tepid, slow and gradual” dollar moves are a sign of investor contentment.

“They’ve taken so long to hike and banged on about it so much that markets feel very comfortable now with the Fed raising rates,” Weston said. “As long as the underlying theme is reflation, the market is happy for the Fed to be hiking.”

And the dollar is not alone. Implied volatility, a measure of expectations for swings in assets, is down across most of the market, Weston said.

“We’re just not experiencing big moves,” he said.

For Masashi Murata, a currency strategist at Brown Brothers Harriman & Co. in Tokyo, the pullback in the U.S. currency is linked to stalling Treasury yields. Ten-year bond rates edged lower Thursday to 2.48 percent after rising 16 basis points over the past five days.

While Yellen was supportive this week, a March hike is still at less than 50 percent odds. The greenback is likely to stay below the key 115 yen level until traders are more confident next month will see a Fed move, Murata said. Foreign currency options expiring Thursday include a $1.11 billion strike at that level, which may be making it a particularly hard hurdle to scale. The dollar lost 0.3 percent to 113.86 yen as of 6:15 a.m. London time.

The greenback’s apathy may be prolonged, according to Nader Naeimi, who heads a dynamic investment fund in Sydney at AMP Capital Investors Ltd., a company that oversees $120 billion.

While the Fed will probably raise borrowing costs twice in 2017, “the positive dollar impact is unlikely to be as prominent as widely believed,” Naeimi said in an interview. He argues that, while the U.S. is on a tightening track, other central banks are likely to catch up, with the European Central Bank poised to reduce its bond-buying program and some emerging-market nations set to end their easing cycles.

“We are past the peak of global monetary policy divergence,” said Naeimi, who is bullish on the dollar against just one other currency -- the yen. “The easy money to be long dollars against everything is well and truly behind us.”

— With assistance by Emma O'Brien, Chikako Mogi, and Netty Idayu Ismail

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