Currency hits two-week high on rate hike bets

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May 13, 2016 4:57 PM

The greenback suffered a sharp sell-off since the start of the year, hitting a 16-month low earlier this month, as market expectations have faded that there would be at least two Fed rate hikes in 2016.

A worker counts U.S. 100-dollar banknotes inside a money changer in Manila, Philippines March 23, 2016. REUTERS/Romeo Ranoco

The dollar hit a two-week high against a basket of currencies on Friday, posting its best fortnightly performance since February, bolstered by the view that the U.S. Federal Reserve is still on track to raise rates before any other major central bank.

But as fears about the global economy and market turbulence have subsided somewhat, some analysts say there are signs the tide could be turning for the dollar and that investors - who now only see around a 60 percent chance of any hike this year - might have pushed out those expectations too far.

The currency was buoyed on Thursday by Boston Federal Reserve President Eric Rosengren, who said the Fed should raise interest rates if data confirms a stronger jobs market and inflation outlook in the second quarter. He added that the markets are too pessimistic on the economy.

The dollar index, which measures the greenback against six major rivals, rose 0.2 percent to 94.442, its strongest since April 28.

"Markets are trading in a way that suggests investors are quite uncomfortable with the extent of their short dollar exposure at the moment," said BNP Paribas currency strategist Sam Lynton-Brown, in London.

Speculators increased bets against the U.S. dollar to the highest in over three years to the week to last Tuesday.

The euro was 0.4 percent down at a two-week low of $1.1329 , ahead of flash euro zone GDP data due at 0900 GMT.

The currency market will have a chance to gauge the underlying strength of the U.S. economy through a batch of data to be released later in the day.

Against the yen, the dollar fell 0.2 percent to 108.52 yen , well clear of an 18-month low of 105.55 hit last week after the Bank of Japan stood pat on monetary policy.

The greenback could face renewed pressure against peers like the yen if U.S. economic indicators fall short of expectations, which would be a new potential headache for Japanese authorities who have managed to arrest the yen's appreciation by threatening to intervene.

"Japanese officials can keep up their verbal warnings and even actually intervene, but the fundamentals continue pointing towards a stronger yen - a view many speculators appear to have embraced," said Junichi Ishikawa, forex analyst at IG Securities in Tokyo.

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