BLBG: Dollar Divergence Trade Spurs Best Run Versus Yen Since August
Dudley, Lacker add to speculation Fed may raise rates in June
U.S., Japan address yen levels at G-7 finance chiefs meeting
Share on Facebook
Share on Twitter
The dollar extended its longest winning streak against the yen since August as traders weighed the possibility of tighter monetary policy in the U.S. against stimulus in Japan and other major economies.
The U.S. currency headed for its best month in a year versus the yen after the minutes of the Fed’s most recent meeting prompted traders to add to bets on a June rate hike. The move was also spurred by Bank of Japan Governor Haruhiko Kuroda reiterating that he’s ready to add to stimulus if necessary. Japan used a meeting of finance chiefs from the world’s major industrialized nations to warn of the economic risks from sharp swings in the yen, even as the U.S. made clear that currency markets remain calm.
The greenback surged for the past three weeks in its longest run of gains since January as traders renewed expectations for the U.S. central bank to raise borrowing costs. The currency’s rebound snapped three months of losses, during which markets questioned the Fed’s ability to tighten monetary policy amid a softening global growth outlook.
“The definition of divergence has really changed,” said Steven Englander, New York-based global head of Group-of-10 currency strategy at Citigroup Inc., the world’s biggest currency trader. “Last year, we thought divergence was four hikes a year for the Fed, now it’s like two hikes, maybe,” he said in an interview on Bloomberg television. He expects the dollar to strengthen when the Fed raises rates.
The dollar rose 0.4 percent to 110.35 yen as of 9:07 a.m. in New York, sending it 1.6 percent higher this week and 3.6 percent this month, the most since May 2015. The greenback retreated 0.2 percent to $1.1221 per euro.
The yield premium offered by two-year U.S. Treasury notes over equivalent Japanese government bonds surged to the highest since the 2008 financial crisis.
“We saw a very big shift in the market’s view on Fed policy” following comments from U.S. officials and the “surprisingly hawkish minutes,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “So far, the Federal Open Market Committee tended to interpret data cautiously. Now they seem to interpret them optimistically. That’s the big shift.”
Against this backdrop, any positive U.S. data would have “a strong impact on dollar rates, more than usual in the recent past,” Leuchtmann said.
There’s a 30 percent chance the U.S. central bank will raise rates at its June meeting, up from just 4 percent on Monday, based on fed fund futures compiled by Bloomberg. The odds for a July move rose to 51 percent from 19 percent.
The dollar also headed for a third weekly gain versus a basket of 10 major peers after New York Fed President William Dudley said Thursday that June is a live meeting for the central bank, and Richmond Fed President Jeffrey Lacker said the case for hiking rates would be “very strong.”
