Dollar Bears Say Fed Hawks Cant Lift Rate Odds Above Coin Toss

Federal Reserve Chair Janet Yellens reiteration that the pace of U.S. interest-rate increases should be gradual wont be enough to raise odds for a hike this year much above a coin toss, according to Westpac Banking Corp. and BNP Paribas SA.

The dollar rose against the yen for a third day Thursday, paring a third straight quarterly loss, after Yellen told lawmakers on Wednesday that a majority of Federal Open Market Committee members see a rate increase likely needed this year, while reiterating there is no fixed timetable. The odds of Fed action by year-end rose to 54 percent from 50 percent prior to Yellens remarks, but are down from 61 percent a week earlier. Westpac and Paribas both expect the U.S. currency to drop back below 100 yen.

Markets arent likely to take seriously Fed protestations that the November meeting is live, and pricing for December should struggle to rise much beyond 55 percent, said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. We see the dollar as still on track for a slip back below 100 yen.

The dollar gained 0.7 percent to 101.36 as of 10:39 a.m. in Tokyo, adding to a 0.4 percent advance from the previous two days. It touched a one-month low of 100.09 on Tuesday, and had dropped to as weak as 99.02 — a level unseen since November 2013 — on June 24 in the immediate aftermath of the U.K. vote to leave the European Union.

Disappointing Data

The dollar has fallen against every developed-market currency except the pound this month, as economic data missed analyst estimates by the most since June. A Bloomberg gauge measuring U.S. data against economist estimates fell to a three-month low at the start of this week, after dropping below zero on Sept. 1 for the first time since July 8.

BNP strategists led by Steven Saywell recommended a short dollar-yen position in a note to clients dated Sept. 29, targeting a slide down to 97 in the weeks ahead.

Given the uncertainties posed by data and financial conditions dependency, we would not expect markets to price the chances of a December hike significantly higher than the 54 percent currently reflected in futures, the note said. We expect markets to continue to build USD short positions against this backdrop.

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