Dollar Strengthens as Yellen May Signal Higher Rates

(Bloomberg) — The dollar rose against most of its major peers before testimony from Federal Reserve Chair Janet Yellen that may underscore prospects for higher U.S. interest rates.

The Bloomberg Dollar Spot Index climbed after Richmond Fed President Jeffrey Lacker was cited by Market News International as saying the central bank may raise rates in June, even if it doesn’t first remove a reference to being “patient” about increases from its policy statements. The U.S. currency has strengthened since the Fed published minutes of its January meeting on Feb. 18 as traders disregarded their assertion that the central bank is willing to keep borrowing costs low for longer.

“The dollar is likely to remain supported beyond Yellen’s speech,” said Ian Stannard, European head of currency strategy at Morgan Stanley in London. “The fact that the dollar has remained strong despite dovish minutes suggests that the dollar is being driven by other factors such as growth differentials.”

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Stannard said the dollar is likely to strengthen more should traders interpret Yellen’s comments as hawkish than it would fall if they are seen as dovish.

Bloomberg’s gauge of the dollar versus its 10 major counterparts rose 0.2 percent to 1,171.54 as of 7:09 a.m. Tuesday in New York. The index touched 1,175.99 on Feb. 11, the highest level since Bloomberg began gathering the data in 2004.

The dollar climbed 0.6 percent to 119.53 yen and was little changed at $ 1.1326 per euro.

Yellen Testimony

Yellen is scheduled to testify in the Senate on Tuesday and in the House of Representatives the following day. She’ll probably provide an update on the central bank’s view after policy makers signaled at their Jan. 27-28 meeting that they’re willing to keep interest rates lower for longer given risks to the economy.

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The January policy meeting was held before a report on Feb. 6 that showed U.S. payrolls rose more in January than economists forecast, capping the strongest three months of jobs growth in 17 years and delivering the biggest wage increase since 2008.

Yellen will be “reasonably upbeat,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “That should leave intact a pretty high probability of at least a summer rate hike and maybe as soon as June. We do expect that the U.S. dollar will emerge somewhat stronger from her testimony.”

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Best Performer

The dollar was the best performer among 10 developed-nation peers in the past 12 months, gaining 16 percent against the basket of currencies, according to Bloomberg Correlation-Weighted Indexes. The euro dropped 6 percent and the yen declined 1.9 percent.

The dollar also strengthened versus the Indonesian rupiah, Hungarian forint and Israeli shekel on Tuesday amid speculation that higher U.S. rates may attract investment away from developing nations to the world’s largest economy, which is seen by money managers as a safer place to park their cash.

New Zealand’s dollar dropped against all of its 16 major peers as a survey of businesses on the central bank’s website showed a gauge of inflation two years ahead fell to 1.8 percent in the first quarter, the slowest pace since 1999. The kiwi tumbled 1 percent to 74.48 U.S. cents, approaching an almost four-year low of 71.77 cents reached on Feb. 3.

Traders predict 17 basis points of reductions to the Reserve Bank of New Zealand’s 3.5 percent target rate over the next 12 months, according to a Credit Suisse Group AG swaps index. A basis point is 0.01 percentage point.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins

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