The dollar index has gained nearly 2 percent since the last week. Fueled by the prospect of Fed rate hikes, dollar may start leading again, analysts say. The question is whether the rate hike will be aggressive enough to fuel the dollar rally.
The dollar's course
could be determined in the next several days by a number of important
events, not the least of which will be the May employment report June 5, according to analysts.
The dollar went sideways to lower for two months and look what happened: the euro just fell 6 cents in seven sessions, said Marc Chandler, chief currency strategist at Brown Brothers Harriman. The reversal was caused by the European Central Bank decision to move up its bond-buying schedule ahead of the summer as well as recent comments from Fed Chair Janet Yellen and Vice Chairman Stanley Fischer about the potential for rate hikes by the U.S. central bank this year.
Mother of the weeks
"Next week is going to be the mother of all weeks," said Chandler, referring to the ECB meeting, jobs data Friday, OPEC gathering Friday and Australian central bank
meeting Wednesday. Moreover, Athens has a debt payment due.
This week, Friday will mark a revised first-quarter GDP, and a G-7 meeting started Thursday in Dresden, Germany.
Chandler thinks the dollar could consolidate into the big events,
such as next Friday's jobs data. Strong employment report could drive traders to further speculate the economy could be strong enough to move
up the anticipated timing of a Fed rate increase. The market is currently pricing in the first Fed rate hike for December,
while previously it had been September. After Yellen spoke Friday, hopes shifted slightly back toward September.
While a number of factors drove the rally, what
will keep the dollar moving higher is the difference between the Federal
Reserve's moves toward tightening as other central banks, like the ECB
and Bank of Japan, remain easy.
Boris Schlossberg, managing director, foreign exchange strategy at BK
Asset Management, noted that Yellen was the biggest factor pushing the dollar
higher.
"The chairwoman is now of the mind that, 'Yes, we are probably going to raise rates before the end of the year,'" said Schlossberg. "Basically her view is: 'It's just a matter of us getting a couple of better data points, and we're ready to go.'"
"To us, it seems like that's the cleanest trade on U.S. rates. The reason it kind of moved as much as it did over the last several days ... is our positioning indicator was telling us people were the least short of yen since the start of Abenomics," Vassili Serebriakov, BNP Paribas currency strategist, said referring to the economics and easy money policy of Japanese Prime Minister Shinzo Abe.
However, Serebriakov does not see the rate hike aggressive enough to support the dollar rally. "Rates flattened since last week, but in terms of what's priced into the U.S. curve, it's still very dovish in terms of both the starting point and the trajectory."
The two-year had a high yield of 0.70 in March and it's still well below that. "If market's do start repricing, we should be breaking through that level."
"There's Greece, back and forth in terms of headlines. It moves the
market intraday, but it's not very directional. We're really looking to
the U.S. to give us direction," he said. The questions is if it is a different dollar rally. Serebriakov thinks it should be, if the Fed lifts rates in September.
