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Dollar hits two-week high vs yen, muted elsewhere – Reuters

HomeNewsDollar hits two-week high vs yen, muted elsewhere – Reuters
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Dollar hits two-week high vs yen, muted elsewhere – Reuters
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By Patrick Graham | LONDON

Further signs that Federal Reserve policymakers are swinging behind a March rise in U.S. interest rates kept the dollar rising against the yen on Thursday while it struggled to make more pace against a resilient euro.

Governor Lael Brainard, a renowned dove on the Fed’s open market committee, was the latest to say on Wednesday that an improving global economy and a solid U.S. recovery mean it will be “appropriate soon” for the Fed to raise rates.

That fueled an almost half percent rise to a two-week high of 114.31 yen and put the dollar in positive territory for a third day running against the euro and its fifth against the pound.

Yet the scale of the gains, given the huge swing in expectations for a Fed hike – from 30 percent at the start of the week to roughly 70 percent on Thursday – was still relatively modest: the dollar index has gained just under 0.7 percent in that time.

“The fact that the dollar hasn’t managed to rally to any order of magnitude is of concern to dollar bulls,” said Richard Benson, co-head of portfolio management with currency fund Millennium Global in London.

“The problem from here is that if you haven’t been involved for a period of time, are you going to bet against the euro when its almost fully-priced for the Fed. The next two percent (move higher for the dollar) may be very sticky.”

The dollar index, which measures the greenback against a basket of six major currencies, was less than 0.1 percent higher on the day on Thursday at 101.84, down off a peak of 102.0 reached in Asian trading.

A widening of U.S.-Japan interest rate differentials helped the dollar, the U.S. two-year yield hovering near a more than seven-year high of 1.308 percent. The benchmark 10-year Treasury yield was also close to a two-week high, last standing at 2.461 percent.

However, some analysts warned that the dollar could weaken despite the widening interest rate differentials should stocks retreat.

“If the Fed goes ahead with a faster pace of rate hikes and shrinks its balance sheet, it will weigh on stock prices,” said Minori Uchida, chief FX analyst at Bank of Tokyo Mitsubishi UFJ.

“Lower share prices and wider yield differentials would result in a weaker dollar, just like in May 2013 when Fed’s Bernanke signaled tapering.”

Speeches from Fed Chair Janet Yellen and Vice Chair Stanley Fischer on Friday are now widely expected to be the final piece of the puzzle, along with next week’s non-farm payrolls.

Traders cite a steady drip of corporate demand for the euro, but Millennium’s Benson and a number of others point to the need for a bigger move in yields of longer-dated U.S. Treasuries if the greenback is to rise further.

“Whether the Fed’s next hike is in March, May or June is less important than whether they go twice or three times this year, and that in turn is less important than what the market prices as a terminal Fed Funds rate,” said Societe Generale strategist Kit Juckes.

“At the moment, the market isn’t convinced that Fed Funds will peak much above 2 percent. A move higher from there would be more supportive for the dollar than any rethink about how fast we get to 2 percent.”

(Additional reporting by Yuzuha Oka in TOKYO Editing by Jeremy Gaunt)

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