Dollar bulls awaken; bond traders' conviction grows

Dollar traders are playing catch-up with the Federal Reserve. The greenback snapped a two-week losing streak after Fed Chair Janet Yellen said the case to raise interest rates is getting stronger, while Vice Chairman Stanley Fischer indicated an increase is possible in September. Those comments follow statements by officials in recent weeks that may persuade sceptical investors that the central bank is getting closer to tighter policy.

"There certainly has been a gap in expectations," said Bill Northey, chief investment officer in Helena, Montana, at US Bank's private client group, which oversees $133 billion in assets. "This certainly does strengthen the case for the Fed to move by year-end. That provides opportunities for the dollar to strengthen."

Friday's rally trimmed the dollar's loss to 4.2 per cent this year on speculation that the US central bank will reduce stimulus and diverge from unprecedented easing in Europe and Asia, boosting the relative allure of the greenback. Currency investors' sentiment has shifted back and forth in recent weeks on how aggressive the Fed will be after it raised borrowing costs in December for the first time since June 2006.

The Bloomberg Dollar Spot Index rose 1.2 per cent this week, the largest gain since the week ended May 6. The greenback climbed 1.1 per cent to $1.1198 per euro and strengthened 1.6 per cent to 101.84 yen.

While hedge funds and money managers trimmed net bullish positions on the dollar for the third week, net-long bets still stand near a five-month high, according to data from the US Commodity Futures Trading Commission. Bets the dollar would rise outnumbered bearish wagers by 79,363 contracts in the week to August 23, compared with 125,117 the previous week. The US currency is forecast to strengthen by the end of the year to $1.09 per euro and 105 yen, according to the median estimates in Bloomberg surveys of analysts.

Benchmark two-year Treasury yields, meanwhile, reached the highest since early June after Yellen's speech. Traders' conviction only grew after Federal Reserve Vice Chairman Stanley Fischer said in an interview that her remarks leave open the possibility of a September hike. The market-implied chance of a boost when the Federal Open Market Committee meets next month rose to 42 per cent, from zero in late June after the UK vote to leave the European Union.