Dollar rallies on expectations of summer interest rates hike

[May 24, 2016]  By Jemima Kelly

The biggest loser among currencies in developed markets was the Australian dollar, which slid by more than 1 percent to its weakest since early March <AUD=D4>. In contrast to hawkish comments from the Fed, the Reserve Bank of Australia fueled speculation overnight that interest rates will be cut again.

Helped by its gains against the euro, the U.S. dollar hit its strongest in eight weeks against a basket of major currencies.  It was 0.4 percent higher against the European single currency at $1.11685.

Investors had virtually priced out the chance of a rate increase before late this year, but hawkish comments from Fed officials over the past week have prompted a rethink. Fed funds futures now imply about a 60 percent chance of a rate hike by July, according to CME FedWatch.

San Francisco Fed President John Williams said on Monday that the central bank was on track to raise interest rates in June or July, despite risks such as Britain's referendum on European Union membership, and will keep the upward momentum next year given U.S. economic strength.

"We've had a very punchy move (in Fed expectations) from a week ago," said BNP Paribas currency strategist Sam Lynton-Brown. "(But) one of the mitigating factors for why we favor fading this rebound in the dollar is that we still haven't heard from (Fed Chair Janet) Yellen.

"We'll hear from her on Friday, but it's not clear whether she'll speak about monetary policy. If she doesn't, the focus is really going to be on when she speaks on June 6."

The Australian currency traded as low as $0.7145, with investors reacting to comments from RBA Governor Glenn Stevens, who said the central bank was committed to inflation-targeting policy.

Stevens was speaking publicly for the first time since the RBA's policy review this month, when it cut the cash rate by a quarter point to a record low 1.75 percent, citing surprisingly low inflation.

"We had the rate cut a few weeks ago (and) the market has been toying with the idea of another move," said Rabobank currency strategist Jane Foley.

"What this was today was a prod at the Australian dollar to try to push it lower. If it wasn’t pushing lower, the chances of an interest rate cut become more likely."

The New Zealand dollar, which tends to follow its Australian counterpart, fell 0.7 percent to a two-month low of $0.6706 .

(Editing by Louise Ireland and David Goodman)

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