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FOREX-Dollar set for biggest rise in three weeks as Fed eyed

Reuters | Washington DC | Updated: 14-06-2019 16:36 IST | Created: 14-06-2019 16:24 IST
FOREX-Dollar set for biggest rise in three weeks as Fed eyed
Image Credit: Pixabay

The dollar rose on Friday and was set for its biggest weekly gain in three weeks as investors squared up for a U.S. central bank meeting next week where policymakers might signal when it plans to cut interest rates for the first time in a decade. But with bets on U.S. interest rates swinging massively - market expectations are now for three rate cuts until end-2019, versus three hikes foreseen just six months ago - investors are growing cautious that policymaker rhetoric might underwhelm.

"There is a risk that the Fed might not be as dovish as what markets expect next week," said Fritz Louw, a currency strategist at MUFG Bank based in London. Markets are pricing in about a 33% probability of a quarter-point rate cut next week and as many as 73 basis points in cumulative rate cuts through the end of the year.

Against a basket of its rivals, the dollar rose 0.1% to a one-week high of 97.09. Elsewhere, the Australian and New Zealand dollars fell as bets on interest rate cuts undermined demand as a Group of 20 meetings later this month kept investors sidelined.

The Aussie fell 0.24% to $0.6892 and was down 1.5% for the week, the biggest decline since mid-May. The Kiwi dollar dropped 0.4% to $0.6529, down 2% for the week. Bond futures imply a 66% probability the Reserve Bank of Australia will follow up it's recent quarter-point easing with another in July. If not, a reduction to 1% is considered certain by August.

Markets were also raising bets of a rate cut by the Reserve Bank of New Zealand. The weakness in the Australian dollar has pushed investors to unwind some of their carry trades, where speculators borrow in a low-yielding currency such as the Swiss franc and invest in relatively higher-yielding ones such as the Australian dollars.

The Australian dollar/Swiss franc cross, a barometer for such speculative bets, has fallen nearly 6% in eight weeks, indicating hedge funds were losing money on such bets.


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