Dollar in stabilizing mode, but eyes more gains as Fed-hike bets boost yields

By Yasin Ebrahim

Investing.com -- The dollar jumped to six-week highs on Wednesday, led by a string of data pointing to a stronger economy that has driven up bets on Federal Reserve rate hikes, steadying the greenback and paving the way for gains in the coming months. 

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, climbed by 0.64% to 103.785, its highest level since Jan.6.

“The USD is stabilizing, and we believe it could trade higher from here in the months ahead,” Janney Montgomery Scott said in a note.

The dollar, which has been hammered since late last year, has found reprieve in rebounding Treasury yields as strong economic data support bets on a more aggressive Fed rate-hike path.

Retail sales rose 3% last month, beating economists’ forecast for a 1.8% increase. The retail sales control group – which is filtered into U.S. GDP – climbed 1.7 %, well above forecasts for a 0.8% rise.

The likely strength in the dollar, Janney Montgomery Scott says, would “be supported by risk aversion returning to asset markets and improved yield differentials between the U.S. and other markets.”

The recent data pointing to strength in the economy including a blowout January jobs report and inflation that remains sticky has many betting that the Fed may go beyond the two rates hikes it projected in December.

“Fed Funds futures are now pricing in 68bp of extra hikes, having added around 7bp in price after the inflation release,” ING said.  

Others are also calling for potential short-term strength in the dollar, though believe the greenback has its work cut out to completely reverse the bearish trend seen since late last year.

“A higher low would be the most compelling reversal in the dollar, Chief Market Strategist David Keller at StockCharts told Investing.com in an interview on Wednesday. This means instead of the dollar just making lower lows, which is what happened for the last four or five months, all of a sudden, we put in a higher low, similar to what the S&P 500 did in December.” 

“We rallied to the 50-day moving average on the dollar index, and at this point it's holding," Keller added. "As long as we remain below that, I think the trend overall is still negative dollar."