Risk of Dollar Rally Seen on Fed Outcome as Rate Rise Odds Climb

Risks are skewed toward a rally in the dollar, National Australia Bank Ltd. and Commonwealth Bank of Australia said,...

Risks are skewed toward a rally in the dollar, National Australia Bank Ltd. and Commonwealth Bank of Australia said, as the currency fails to keep up with increasing speculation the Federal Reserve can raise interest rates again by June.

A gauge of the dollar has slumped 3.7 percent since rising to its highest level in data starting from 2004 in January. That’s even as the probability of a rate increase by the Fed’s June 14-15 meeting rose to 54 percent in futures markets, from as low as 2 percent on Feb. 11. The two-year Treasury note yield has climbed about 31 basis points in that time. Chair Janet Yellen and her colleagues have an opportunity to clarify where they stand on the outlook for policy when a two-day meeting wraps up today.

“The rates market has increasingly come to the view that it’s been overly complacent, and yet the dollar is still pretty much flat on its back,” said Ray Attrill, co-head of currency strategy at NAB in Sydney. “If whatever the Fed says overnight at least underpins the grind higher we’ve seen in U.S. yields, then I’m on the lookout for that being reflected in a somewhat stronger dollar.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was unchanged at 1,209.49 as of 9:53 a.m. in Tokyo from Tuesday. It was as high as 1,256.40 on Jan. 21. The greenback added 0.1 percent to 113.31 yen, and was little changed at $1.1103 per euro.

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“The Fed funds rate normalization path will be well ahead of market pricing,” Joseph Capurso, a currency strategist at Commonwealth Bank in Sydney, wrote in a client note. The risk is the Fed’s rate-setting Open Market Committee is seen to be less dovish and support a gain in the dollar, he said.

To contact the reporter on this story: Kevin Buckland in Tokyo at kbuckland1@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Naoto Hosoda, Nicholas Reynolds

By: Kevin Buckland

©2016 Bloomberg News

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