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Tokyo - A gauge of the dollar pared its best monthly performance since January 2015 as traders weighed the timing of Federal Reserve policy tightening, after some central bank officials emphasized interest rates may rise as many as three times this year.
The Bloomberg Dollar Spot Index fell for a second day after closing at a two-month high on Tuesday, as a momentum indicator approached a level that signals the currency may have moved too far, too fast. The greenback gauge has climbed 3% this month as the odds a Fed move in June jumped almost three-fold to 34%.
Officials including the presidents of the Fed’s regional arms in San Francisco, Boston and Philadelphia voiced their support for higher rates.
“The dollar overall remains in an uptrend, even if that move pauses,” Kit Juckes, a London-based strategist at Societe Generale SA, wrote in a note to clients. “There ought to be smiles at the Federal Reserve: so far, so good for their plan to persuade markets to price in a faster pace of rate hikes.”
Bloomberg’s dollar index, which tracks the greenback against 10 peers, slipped 0.2% as of 08:03, adding to a 0.2% decline on Wednesday. The US currency slid 0.2% to $1.1181 per euro, and dropped 0.5% to ¥109.67. It weakened 0.7% to 8.3045 Norwegian krone.
While the dollar gauge has advanced for the past three weeks, caution reigns after policy makers’ pro-tightening comments earlier this year quickly gave way to rhetoric on slowing US growth.
Hedge funds and other large speculators are the most neutral on the US currency in two years. The tightening talk failed to spark price swings as a JPMorgan measure of global foreign-exchange volatility fell to the least since January.
For a story on how the dollar is key to prospects for a US rate rise, click here.
Hedge funds reduced wagers against the dollar to a net 10 653 contracts in the week through May 17. That’s the smallest bet on either dollar strength or weakness since June 2014.
The outlook for higher interest rates has increased since then, with futures contracts showing a 34% probability of a June hike, up from 12% at the end of last month.
The dollar gauge’s 14-day relative strength index rose to 66 on Tuesday, nearing the 70 level that indicates an extended move. It had fallen back to 59 on Thursday.
“I would chalk it up to a pause, month-end is right around the corner,” said Joe Manimbo, an analyst with Western Union Business Solutions, a unit of Western Union, in Washington. “The dollar certainly is on a rosier path given that we’ve seen bullish data and hawkish commentary from a series of Fed officials.”
