Will Yellen set the dollar free?

The U.S. dollar has been range bound for weeks, but if Federal Reserve Chair Janet Yellen sounds more upbeat about the labor market in her testimony to Congress this week, analysts say the greenback could test recent highs against several currencies.

“The U.S. dollar has been in consolidation mode. If Janet Yellen comes out sounding fairly hawkish and suggests the rate hike cycle could start in the middle of the year, the dollar could rise,” said ANZ senior currency strategist Khoon Goh.

The greenback has been waiting for a fresh catalyst for a month following its near 19 percent surge from September to 95.50 in January, to 12 year highs. If the scenario that Goh outlined comes true, the U.S. dollar index could test its all-time high, he said; it’s currently around 94.58.

Expectations that the Fed will hike rates sooner rather than later underpinned the dollar’s rise, but some soft economic data including Monday’s below-view housing figures are limiting further gains.

Investors will focus on Yellen’s testimony to Congress on Tuesday and Wednesday for further clues on when the Fed will hike rates. Should she sound “more upbeat about labor market developments, it would be a key factor in conditioning the markets’ expectations that the Federal Reserve is preparing to create options to set the stage for a rate hike at its next meeting,” said National Australia Bank’s (NAB) co-head of FX Strategy Ray Attrill.

He sees the U.S. dollar index rallying by 0.5 percent or dropping by 1 percent, depending on whether Yellen is hawkish or dovish.

Timing the rate hike

“Currency markets have been more confident about an earlier rate hike, perhaps in June, than the bond markets, which are factoring in an October rate hike,” said NAB’s Attrill.

But even if Yellen confirms the markets’ dollar-long positions with hawkish comments, it won’t have equal impact on all currencies, say analysts.

Read More Watch this part of Yellen’s remarks for a mover

The Australian and New Zealand dollars “would be the most vulnerable” given that both countries have higher interest rates than the U.S., said Attrill. He sees the AUD testing the recent lows of $ 0.77-0.78 and the NZD of $ 0.76.

The euro is also likely to be sold, barring unexpected surprises about Greece, analysts said. NAB’s Attrill sees the euro testing the $ 1.1280-1.13 level, while ANZ’s Goh tips a test of $ 1.1300.

The euro, Australian dollar and New Zealand dollar were around $ 1.1334, $ 0.7767 and $ 0.7469, respectively, mid-day in Asia.

The dollar is expected stuck in the 118-120 range against the yen, regardless of how dovish or hawkish Yellen is. The 120 yen line is seen as a stubborn resistance level for the Japanese currency: “It remains to be seen whether what will be catalyst to break the yen out of the 116-120 range where it has been seen the end of 2014,” said Mizuho Securities’ chief currency strategist Kengo Suzuki in a note. In Asia mid-day, the yen was fetching 119.05.

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