US dollar traders are playing catch-up with the US Federal Reserve.
The greenback snapped a two-week losing streak after US Fed Chair Janet Yellen said the case to raise interest rates is getting stronger, while Fed Vice Chairman Stanley Fischer indicated an increase is possible next month.
Those comments follow statements by officials in recent weeks that may persuade skeptical investors that the central bank is getting closer to tighter policy.
“There certainly has been a gap in expectations,” said Bill Northey, chief investment officer in Helena, Montana, at US Bank’s private client group, which oversees US$133 billion in assets. “This certainly does strengthen the case for the Fed to move by year-end. That provides opportunities for the dollar to strengthen.”
DIVERGENCE?
Friday’s rally trimmed the US dollar’s loss to 4.2 percent this year on speculation that the US central bank would reduce stimulus and diverge from unprecedented easing in Europe and Asia, boosting the relative allure of the greenback.
Currency investors’ sentiment has shifted back and forth in recent weeks on how aggressive the Fed will be after it raised borrowing costs in December last year for the first time since June 2006.
The Bloomberg Dollar Spot Index advanced 1.2 percent this week, the largest gain since the week ended May 6.
The greenback climbed 1.1 percent to US$1.1198 per euro and strengthened 1.6 percent to ￥101.84.
On Friday, Yellen expressed confidence that tighter labor markets over time would push inflation back to the central bank’s 2 percent goal. The likelihood of a boost to rates at the Fed’s meeting on Sept. 21 reached 40 percent, up from 32 percent the day before, futures prices show.
“As long as the odds are rising, we are likely to see pressure on emerging-market currencies and US dollar strength,” said Steven Englander, global head of G10 currency strategy at Citigroup Inc in New York.
While hedge funds and money managers trimmed net bullish positions on the US dollar for the third week, net-long bets still stand near a five-month high, according to data from the US Commodity Futures Trading Commission.
Bets the US dollar would rise outnumbered bearish wagers by 79,363 contracts in the week to Aug. 23, compared with 125,117 the previous week.
The US currency is forecast to strengthen by the end of the year to US$1.09 per euro and ￥105, according to the median estimates in Bloomberg surveys of analysts.
“We’re positioned for dollar strength,” said Jason Thomas, Los Angeles-based chief investment officer of Savos Investments, a unit of AssetMark Inc., an asset manager that oversees US$31 billion.
That is because the US dollar is undervalued relative to the resilience of the US economy, he said.
WEAK NT DOLLAR
In Taipei, the US dollar rose against the New Taiwan dollar on Friday, gaining NT$0.002 to close at NT$31.672 after consolidating amid cautious sentiment ahead of Yellen’s speech later in the day, dealers said.
The greenback also climbed 0.2 percent from NT$31.618 on Aug. 19, Taipei Forex data showed.
While the weakness of other regional currencies put pressure on the NT dollar, its losses were limited as foreign institutional investors bought a net NT$3.5 billion worth of local shares, they said.
Meanwhile, the British pound looks set for a litmus test next week with the release of housing data and purchasing managers’ surveys that might crimp the currency’s best run since May versus the US dollar.
Sterling climbed for the second week versus the US currency, its first back-to-back gain since before the UK voted to leave the EU in June, as credit and export orders data this week proved more resilient than analysts had envisaged.
Further upside surprises in economic data may extend sterling’s advance, after it strengthened this week against all of its 16 major peers.
While analyst forecasts suggest reports will show consumer confidence improved and manufacturing output contracted at a slower pace this month than in the previous month, housing data will indicate further signs of weakness, with mortgage approvals forecast to fall to their lowest since March last year.
“I’m still cautious into next week,” said Roberto Mialich, a senior foreign-exchange strategist at UniCredit SpA in Milan. “Despite some resilient data, we still expect more deterioration in the UK economy. That in our view will become more evident in the coming months.”
The pound climbed 0.7 percent this week to US$1.3164 as of 5pm in London, extending last week’s 1.2 percent gain. Sterling appreciated for the first time in six weeks versus the euro, climbing 1.5 percent to ￡0.8535.
“We still see more sterling weakness,” Mialich said.
The UK currency could fall to US$1.20 and weaken to ￡0.93 per euro by year-end, he forecast.
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