LDN - Business

Dollar hits two-week high, posts best fortnight since February

[May 13, 2016] By Jemima Kelly

LONDON (Reuters) - The dollar hit a two-week high against a basket of currencies on Friday, posting its best fortnightly performance since February, bolstered by the view that the U.S. Federal Reserve is still on track to raise rates before any other major central bank.

The greenback suffered a sharp sell-off in the first four months of the year, hitting a 16-month low, as market expectations of at least two Fed rate hikes in 2016 faded.

But as fears about the global economy and market turbulence have subsided somewhat, some analysts say there are signs the tide could be turning for the dollar and that investors - who now only see around a 60 percent chance of any hike this year - might have pushed back their expectations too far.

But others reckon the dollar's correction - a 3 percent rise against a basket of currencies in the last 10 days <.DXY> - will be shortlived.

"I still have my doubts that this is necessarily a sustainable trend," said BNY Mellon currency strategist Neil Mellor, in London. "The market is perhaps getting quite excited about these increasingly consistent commentaries that are coming out of the Fed."

"What we're seeing is the Fed just trying to maintain some flexibility - it doesn't want the market to decide policy for it, so it wants to keep its options open."

The currency was buoyed late on Thursday by Boston Federal Reserve President Eric Rosengren, who said the Fed should raise interest rates if data confirms a stronger jobs market and inflation outlook in the second quarter. He added that the markets are too pessimistic on the economy.

Speculators increased bets against the U.S. dollar to the highest in over three years to the week to last Tuesday.

"Markets are trading in a way that suggests investors are quite uncomfortable with the extent of their short dollar exposure at the moment," said BNP Paribas currency strategist Sam Lynton-Brown, in London.

The euro fell 0.4 percent to a two-week low of $1.1329, but did not appear to be moved by data showing euro zone GDP grew by 0.5 percent in the first quarter, in a downward revision of an earlier estimate.

The currency market will have a chance to gauge the underlying strength of the U.S. economy through a batch of data to be released later in the day.

Against the yen, the dollar fell 0.1 percent to 108.86 yen <JPY=>, well clear of an 18-month low of 105.55 hit last week after the Bank of Japan stood pat on monetary policy.

"Japanese officials can keep up their verbal warnings and even actually intervene, but the fundamentals continue pointing toward a stronger yen - a view many speculators appear to have embraced," said Junichi Ishikawa, forex analyst at IG Securities in Tokyo.

(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Toby Chopra)


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