Dollar's Battle Gets Harder With Fed No Longer Only Hawk in Town

(Bloomberg) -- It’s not so much that the Federal Reserve moved backward, but everyone else jumped forward.

The dollar is trading at the lowest level in nine months, having erased the so-called Trump bump and then some, as currencies including the euro, pound and loonie surge on expectations of tightening monetary policy. That’s helped to push yields on foreign debt higher on a relative basis, making it even tougher on dollar bulls.

“All of this means that the dollar gets less support from U.S. interest rates,” said Kit Juckes, a strategist at Societe Generale SA. “A stronger dollar needs higher yields than it did before, because the rest of the world is moving.”

The 10-year U.S. Treasury yield has fallen to the lowest in eight months relative to its German counterpart amid this shift in expectations for tighter monetary policy in Europe.

At the European Central Bank’s yearly conference in Portugal this week, President Mario Draghi led the global pivot with a speech that downplayed deflation risks and hinted at paring monetary stimulus. Bank of England Governor Mark Carney followed with a suggestion that the BOE is coming closer to a rate increase, while Bank of Canada’s Stephen Poloz maintained that he’s considering a rate hike as well.

Meanwhile, the dollar has faltered, despite Fed Chair Janet Yellen reaffirming this week that the U.S. central bank’s policy tightening schedule is on track to raise interest rates for a third time this year. Normally that would be a boost for the greenback.

“The problem with this convergence however is that the Fed is already in tightening flight mid-air with other central banks just about to take off the runway,” said Deutsche Bank AG strategist George Saravelos in a note. “Hawkish co-ordination in such an environment can do serious damage to the dollar.”

--With assistance from Samuel Potter and Andrea Wong

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net.

To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Brendan Walsh