FX round-up: US dollar mixed as traders mull June rate hike

The US dollar turned in mixed performances against sterling, the euro and yen today as markets factor in the likelihood of a June rate hike by the US Federal Reserve, which in turn saw global stocks indices, crude oil and metals prices slump.

At 17:04, sterling was up 0.03% to $1.4604, while the dollar rose 0.02% to €0.8917 and fell 0.36% on safe-haven appeal to 109.79 yen. The dollar-index spot price gained 0.16% to $95.236, extending its rise from early May. The dollar made mild gains against most commodity units, as did sterling, continuing yesterday's run-up as Brexit concerns ebbed.

Markets were a sea of red. Major stocks indices in UK and Europe plunged lower, and Wall St was retreating. Safe-haven gold dropped to $1251.90 an ounce, with copper and silver fading alongside softer crude oil prices.

At 18:18 BST traders put the odds of a June hike by the Fed at 26.3%, from 39% on Wednesday night and 4% on Monday, helping explain the dollar's rise this week. Nonetheless, it was obvious investors had yet to fully price-in a June or July rate rise to the dollar.

Capital Economics chief global economist Julian Jessop thought the case for a June rise was even higher than Wednesday's highs, but cautioned on context. "Whether the Fed moves next month or waits a little longer –- perhaps for Brexit uncertainty to clear –- the markets are complacent about the risks of further tightening over the next couple of years."

Mixed recent messages from Fed officials did not help. Regional bosses Robert Kaplan, Dennis Lockhart and John Williams were hawkish Tuesday, and the usually dovish Federal Open Market Committee (FOMC) member Eric Rosengren said last week he could conceivably vote for a June lift.

However, while the Fed's vice chairman, Stanley Fischer, today said the US needed faster potential economic growth in order to lift the long-run equilibrium interest rate, he stayed quiet on the matter of a June rate rise.

Markets were tense ahead of Fischer's speech given that his thinking is thought to run along similar lines to that of the Fed chair Janet Yellen herself.

"What we need most, now that we are near full employment and approaching our target inflation rate, is faster potential growth," said Fischer.

Fellow policymaker William Dudley - who was also a vote wielding member on this year's FOMC - on the other hand focused on the importance of incoming data on the Fed's economic views but did hold out the possibility of a June rate hike.

However, he added that if the Fed chose not to tighten policy next month that would not undermine its credibility, diluting the impact of his remarks a little.

There was ample US data out on Thursday. The Labor Department said US initial jobless claims came in a little less than expected, and the Fed Reserve Bank of Philadelphia's diffusion index for current manufacturing activity unexpectedly weakened in May.

The FOMC's candid April minutes referred to a trinity of criteria for a June rate hike -- a Q2 pick-up in growth, upside progress in inflation and an ongoing labour-market firming.

"Although the US April labour data disappointed, it can be argued that all three conditions are close to being fulfilled," said Rabobank, pointing to PCE inflation data and payroll numbers due, respectively, on 31 May and 3 June.

"Assuming no negative shocks from these, we see the chances of a June rate hike as being high."