Dollar Rises To Two-Month High on Fed Rate-Increase Speculation

The dollar climbed to a two-month high against the euro as traders boosted wagers that U.S. interest rates will rise, starting as early as next month.

The greenback strengthened versus most of its major peers after Federal Reserve Bank of Philadelphia President Patrick Harker said on Monday, May 23 that he could see two to three rate increases this year, echoing remarks by the San Francisco Fed Bank’s John Williams.

Futures are indicating for the first time since March a better-than 50 percent chance that the Federal Open Market Committee will raise rates by its July meeting.

Dollar Strength Coming Back

The U.S. currency is getting a boost as officials talk up the possibility of tighter policy, reigniting speculation that dollar-denominated assets will benefit from policy divergence with central banks in other parts of the world that are either extending or maintaining monetary stimulus. Futures trading signal a 40 percent chance of a deposit-rate cut by the European Central Bank this year.

“We are seeing dollar strength coming back as the market increases their expectations for the possibility of a Fed June or July rate hike,” said Eimear Daly, a currency strategist in London at Standard Chartered Plc. “The market is really clinging onto their belief of monetary policy divergence.”

The dollar gained 0.7 percent to $1.1141 per euro as of 12:03 p.m. New York time on Tuesday, May 24, the strongest level since March 16. It advanced 0.7 percent to 110.03 yen. The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, rose 0.2 percent.

Follows Prolonged Slump

Volatility for Group-of-Seven nations’ currencies slumped to its lowest in two months, a JPMorgan Chase & Co. gauge shows.

The currency’s gains follow the greenback’s most prolonged slump since 2013. The dollar sank more than 8 percent from mid-January through early May, prompting analysts and investors to question whether the divergence trade had run its course.

With Fed speakers increasingly signaling a hike in the next few months, that trade has reignited.

“It’s general sentiment plus markets increasingly factoring in an imminent rate hike by the Fed,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “This is what the FOMC members are trying to prepare markets for. The latest one was Harker, who confirmed that if the data came in robust enough, a hike in June was likely.”

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