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London - The dollar climbed to the highest this month versus the yen as traders’ expectations of at least one Federal Reserve interest-rate increase in 2016 remained intact despite a weaker-than-forecast US jobs report.
A gauge of the greenback versus major peers extended its biggest weekly gain of the year - even though hedge funds have been betting on dollar declines since April. After the jobs data, New York Fed President William Dudley said in a New York Times interview that it remains a “reasonable expectation” that officials will raise rates twice this year.
“There was a very considerable build-up in dollar short positioning” sparked by dovish Fed meetings in March and April, and that “may have proved too much,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark.
“People were trading that catalyst” but “at some point, you just run out of energy for that move,” Hardy said. “The key sign of that is the reaction like you saw on Friday - when you have a not-so-great US jobs report and yet the dollar is quite stable after a week of relative strength.”
Best week
The US currency rose 0.8% to ¥108.02 as of 13:00, having touched ¥108.09, the highest since April 29. The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, gained 0.2%, after climbing 1.5% last week, the most since November 6.
While Dudley said the employment report was “ a touch softer,” it won’t affect his economic outlook, according to the interview with the New York Times on Friday.
The Fed official’s comments may have had “a short-term influence” on the dollar, which is recovering after three months of losses, said Kathrin Goretzki, a foreign-exchange strategist at UniCredit SpA in London. “Our view remains that the dollar is overvalued.”
Hedge funds’ bullish yen bets held near their April peak, which was the highest in data going back to 1992, according to the most recent figures from the Commodity Futures Trading Commission in Washington. At the same time, speculators extended so-called net-short positions on the dollar versus eight major currencies to the most since April 2014.
“The yen has more scope for losses against the dollar if Fed officials keep their hawkish tone,” Masafumi Yamamoto, chief currency strategist in Tokyo at Mizuho Securities, wrote in a note to clients.
“The yen seems to have priced in both positive and negative aspects of the jobs report.”
