Dollar Rallies on Presumed Pause for the Fed

By Jennifer Yousfi
Managing Editor

The dollar continued its rise today (Monday) on the assumption that the U.S. Federal Reserve plans to halt its aggressive rate-slashing campaign.

Federal Reserve Chairman Ben S. Bernanke will be speaking tomorrow (Tuesday) and is expected to confirm that the Fed plans to hold rates steady at the next Federal Open Market Committee (FOMC) meeting on June 24 and 25.

"Much of the recent dollar appreciation is on the back of speculation that the country's economy may have turned something of a corner so anything that serves to derail this observation will ultimately end up weighing on the greenback," James Hughes, a market analyst at CMC Markets PLC, told The Associated Press. "The assumption, however, remains for the time being that the Fed is nearly at the end of its accommodative approach to monetary policy and the run of cuts we've seen of late will not continue for much longer."

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After reaching a historic low of $1.6019 versus the euro on April 22, the dollar has since gained 3.5%. Language in the April 30 FOMC statement that the "substantial easing of monetary policy to date" would help "promote moderate growth over time" was a signal that the Fed is ready to ease off and let the Fed Funds rate stay at its current level of 2.0% over the coming months.

"It's not going to be an express train toward a much stronger dollar, but it will trade stronger slowly and gradually," Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products (AIG) in Wilton, Connecticut, told Bloomberg News. "The [United States] is not going to have as deep a downturn as everyone initially portrayed."

Bloomberg reports that traders are finally taking a bullish stance on the dollar for the first time in over two years. And Fed Funds futures traded on the Chicago Board of Trade are indicating an 82% probability that the FOMC will vote to hold rates steady in June.

If the Fed pauses as is expected, it should help to bolster the weak greenback.

"It's doubtful that the Fed can afford to cut more," Benedikt Germanier, an analyst at UBS AG (UBS) in Stamford, Connecticut, in an interview on Bloomberg Television. "We are short on the euro-dollar. Our three-month forecast is $1.47."

At 11:01 in New York, the dollar traded at $1.5496 against the euro according to Bloomberg.

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