US dollar rises before Fed as Kuroda says minus 0.5% rate possible

[TOKYO] The US dollar strengthened for the first time in three days versus the yen on speculation the Federal Reserve will reaffirm its commitment to raising interest rates and as Deutsche Bank AG said Janet Yellen may keep the door ajar for an April increase.

The US currency rose against 13 of its 16 major peers before Ms Yellen has an opportunity to clarify the Fed's rate outlook when a two-day meeting ends Wednesday. The yen fell after Bank of Japan governor Haruhiko Kuroda said there was quite a lot of room to cut the key rate, which may theoretically go to minus 0.5 per cent. The extra yield investors get for US two-year notes instead of similar-maturity Japanese bonds climbed to the highest since 2008 this week.

"If whatever the Fed says overnight at least underpins the grind higher we've seen in US yields, then I'm on the lookout for that being reflected in a somewhat stronger dollar," said Ray Attrill, co-head of currency strategy at National Australia Bank Ltd in Sydney.

"Treasury yields have been singularly the strongest lead indicator for dollar-yen movements." The US dollar climbed 0.2 per cent to 113.47 yen as of 11:46 am in Tokyo after dropping 0.6 per cent during the previous two days. The US currency was little changed at US$1.1105 per euro. The yen dropped 0.2 per cent to 125.91 per euro.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers advanced for a third day, gaining 0.1 per cent. The gauge has slumped 3.7 per cent since rising in January to its highest level in data starting from 2004.

Fed policy makers are scheduled to release new projections for the appropriate pace of rate increases for the first time since they voted to raise their benchmark in December. At that time, the median forecast implied four quarter-point moves this year.

The odds of an increase by the June 14-15 meeting are 54 per cent, up from as low as 2 per cent probability on Feb 11, according to data compiled by Bloomberg based on fed fund futures. The probability of an increase by year-end is 80 per cent.

"The Fed funds rate normalization path will be well ahead of market pricing," Joseph Capurso, a currency strategist at Commonwealth Bank in Sydney, wrote in a note to clients. The risk is the Fed's rate-setting Open Market Committee is seen to be less dovish and support a gain in the dollar, he said.

The US dollar will probably respond favorably to FOMC signals and Ms Yellen will try to keep her options open, Alan Ruskin, Deutsche Bank's global co-head of foreign-exchange research in New York, wrote in a research report.

"This also means leaving the door wide open to a June hike, and even ajar to an April hike," he wrote, saying the March payrolls report and global risk sentiment will be important deciding factors.

"The market will see this as more hawkish than currently discounted."

BLOOMBERG