Dollar Halts Two-Day Advance as Traders Brace for Yellen Speech

(Bloomberg) -- A gauge of the dollar fell, halting a two-day advance, on speculation Federal Reserve Chair Janet Yellen will stop short this week of affirming the central bank will raise interest rates by year-end.

The U.S. currency retreated against all except one of its 16 major counterparts before Yellen speaks Friday at an annual symposium in Jackson Hole, Wyoming. The dollar strengthened Monday after Fed Vice Chairman Stanley Fischer said the U.S. economy was close to meeting the central bank’s goals. His comments followed similar signals from other Fed officials last week.

“The market believes that Yellen will not give any signal about the timing of the Fed’s next rate rise at Jackson Hole,” said Mansoor Mohi-uddin, a strategist at Royal Bank of Scotland Group Plc in Singapore. “This may keep the dollar capped this week, but we think a strong dollar rally is coming” as Fed officials including Fischer have signaled the prospect of renewed tightening this year, he said.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, fell 0.2 percent as of 10:47 a.m. in London after rising 0.6 percent in the previous two days. The greenback weakened 0.2 percent to 100.17 yen and depreciated 0.1 percent to $1.1331 per euro. 

Despite the recent rhetoric, the Fed will be aware that there are some dangers posed by raising rates in a global environment where many central banks are engaged in easing measures, according to Peter Rosenstreich, head of market strategy at Swissquote Bank SA.

Policy Divergence

Any rate increase could have a potential over-reach as Fed policy diverges from the Bank of Japan, the European Central Bank and the Bank of England, Rosenstreich, based in Gland, Switzerland, said. The higher yields offered by the dollar, relative to other major currencies, could cause deflationary pressure and an amplified tightening effect, he said.

The Fed “can only raise rates when other central banks start becoming hawkish,” said Rosenstreich, “When you have the BOJ on the verge of helicopter money, you cannot even lean toward tightening in our book.”

“The over-reach is something that has to be considered, meaning that if they raise 25 basis points, they may get 50 basis points worth of tightening to the dollar,” he said.

Fed Toolkit

The topic of Yellen’s speech at Jackson Hole is “The Federal Reserve’s Monetary Policy Toolkit.” References to the toolkit in the past have often served to note other accommodative policy tools at Fed’s disposal, according to Vincent Cignarella, a foreign-exchange strategist who writes for Bloomberg.

There’s a 24 percent chance the U.S. central bank will increase rates at its Sept. 20-21 meeting, and 51 percent odds of a move by year-end, according to data compiled by Bloomberg based on fed fund futures.

One-month implied volatility for the dollar versus the yen, a measure of anticipated price swings based on options, surged Monday to the highest level since July as the period covers the date of next month’s policy decisions from both the Fed and the BOJ.

“There are still four months left to the year, so any hawkish comments spark dollar buying only briefly,” said Yasuhiro Kaizaki, vice president for global markets at Sumitomo Mitsui Trust Bank in New York. “Market focus will have to be on Jackson Hole and whether Yellen indicates an intention to raise rates this year. The dollar is looking vulnerable.”

--With assistance from Mika Otsuka and John Ainger To contact the reporters on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net, Netty Ismail in Singapore at nismail3@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Keith Jenkins