US dollar bulls and bears are united on one thing: Next week’s US Federal Reserve meeting will dictate the path of the US currency.
Price swings by the greenback versus the euro reached the highest level since January, raising the stakes for central bank policymakers who have acknowledged a strong dollar poses an economic headwind. Traders are preparing to parse every post-meeting syllable from Fed Chair Janet Yellen for guidance on the timing of its first rate interest-rate increase since 2006 and the path beyond.
“It has the potential to be a lot more volatile,” Greg Anderson, Bank of Montreal’s global head of foreign-exchange strategy, said by phone from New York. “A more-hawkish-than-expected Fed and one that really lays the groundwork for a September hike and the dollar’s going to take off a couple of percent. A really-dovish Fed and the dollar’s going to lose 2 percent.”
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 of its major peers, fell 1.4 percent this week in New York, the first decline since May 15. The US currency slumped 1.4 percent to US$1.1266 per euro and dropped 1.8 percent to ¥123.39.
A one-month gauge of volatility in euro-dollar rose above 14 percent, its highest since Jan. 16.
The dollar has gained 5.6 percent during the past six months, the second-best performer behind the Swiss franc against a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
While economists see the Fed’s first rate increase coming at its September meeting, there is an almost 40 percent chance policymakers will delay that increase if job gains stumble or inflation stalls, a Bloomberg survey of 53 analysts taken from June 5 to 9 shows.
Fed fund futures give a 53 percent probability that the central bank would increase rates in September, according to data compiled by Bloomberg.
Meanwhile, the pound posted its first week of gains since mid-May against the dollar, with the US currency weighed down by renewed investor uncertainty on when the Fed would tighten monetary policy.
Sterling strengthened against eight of its G10 currency counterparts in a week of fluctuations in euro-area bond markets and while Greece and its creditors struggled to strike a deal to avoid default.
It pared gains on Friday after Standard & Poor’s said that Britain’s top “AAA” credit rating is at risk because of the government’s planned referendum on EU membership.
Sterling rose 0.3 percent at US$1.5561 as of 6:12pm on Friday in London, after earlier rising 0.5 percent to US$1.5598, the highest level since May 22. The currency is up 1.9 percent this week, its first weekly gain since May 15.
The pound strengthened 0.4 percent this week to £0.7250 per euro, recovering from the £0.7389 it touched on Tuesday, its weakest since May 8.
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