Dollar Heads for Best Month in 6, on Rate Hike Expectations

The dollar climbed towards a two-month high against a basket of currencies on Tuesday and was on track to record its strongest month in a half year, on growing expectations that U.S. interest rates will rise in the coming months.

Against the yen, the greenback was set to post its best month in 1½-years, having gained around 4.5 percent since the start of May after a number of intervention warnings from Japanese officials pushed down the Asian currency.

The latest trigger for dollar strength came from Federal Reserve Chair Janet Yellen, who on Friday said a rate increase in the coming months “would be appropriate” if the economy and labor market continued to improve.

The dollar index, which measures the greenback against a basket of six major peers, rose 0.3 percent on Tuesday to 95.802 , close to the previous day’s two-month high of 95.968 and putting the dollar on track for its best month since November.

In London, Societe Generale macro strategist Kit Juckes said he did not expect the Fed to raise rates in either June or July, but that the fundamentals – namely economic and policy divergence between the United States and other major economies – pointed towards further dollar strength.

“The question for me here is whether the dollar can carry on rallying on the prospect of the Fed raising rates faster over the next 18 months than is priced in, as opposed to rallying only on expectations of a move in June or July,” Juckes said.

An exception to the greenback’s broad strength on Tuesday was the Australian dollar, which jumped almost 1 percent on better-than-expected domestic economic data. Still, the Aussie is on track for an almost 5 percent fall this month – its worst performance in almost a year.

Against the yen, the dollar rose towards a one-month high, trading up 0.1 percent on the day at 111.16 yen.

The dollar also fetched a one-month high of 111.455 yen on Monday before stepping back to around 111.09 yen, almost 6 yen higher than a 1½-year low struck earlier in the month against the Japanese currency.

If U.S. payrolls due on Friday show solid job growth and if Yellen signals a rate hike in her speech on the following Monday, the dollar could break through the previous April peaks of nearly 112 yen, said Koichi Takamatsu, manager of forex at Nomura Securities.

But that scenario may not materialize if the specter of a U.S. rate hike hurts broader risk sentiment and boosts demand for safe havens such as the yen, Takamatsu added.