Currency News: Coming Interest Rate Hike Makes Dollar Bullish

Currency News

The US dollar rose last week, even reaching 12-year highs against the yen, due to remarks from Federal Reserve chair Janet Yellen. The dollar has been bullish over the last eight months because the Federal Reserve is on pace to raise interest rates before counterparts like the European Central Bank or Bank of Japan take similar action. In fact, these banks have recently started periods of quantitative easing, and the higher interest rates would make the dollar more attractive to yield-hungry investors.

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Investors had started pulling away from the dollar, causing it to slightly fall from March to the beginning of May. US data was not as strong as had been hoped for, and analysts speculated that the Federal Reserve would wait longer than expected to raise interest rates from near-zero. However, after a Federal Reserve meeting last week, Yellen said that they were on pace to raise interest rates this year, as the economy showed signs of recovery. The key metrics that the Fed is keeping its eye on are inflation and unemployment, both of which have shown progress.

Data in May showed that the US economy has started to recover from a weak start to the year, caused mostly by a harsh winter. On Friday, data showing that the US economy contracted during the first quarter was released, but it was slighter than expected. There is plenty of upside potential for the dollar as the economy should rebound¬†during the coming quarter, and an interest rate hike becomes more imminent. The big data to keep an eye on this week is the US May nonfarm payrolls numbers, which will be released on June 5th. The labor market is key to the Fed’s interest rate timetable, so the results will play a key role in the dollar’s trading next week.

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