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Dollar rebounds ahead of Jackson Hole meeting

The US dollar rebounded on Tuesday ahead of this week’s Jackson Hole symposium, with some investors eyeing the possibility of Federal Reserve chair Janet Yellen hinting at a steeper rate of monetary policy tightening despite scepticism from many analysts.

The dollar index was 0.4 per cent firmer late morning in London, erasing losses from Monday, as the euro slipped 0.5 per cent to $1.1751.

Viraj Patel, foreign exchange strategist at ING, said this Friday’s speech by Ms Yellen was likely to be a non-event but could yet surprise investors and push the dollar higher.

“If chair Yellen does allude to a steeper Fed tightening path, then not only would short-term US rates and the dollar move higher, but there is only one direction for risky assets, and that is down,” he said. “This is certainly the case if US or global politics also continues to weigh on broader risk sentiment in the near term.”

After tightening policy three times in quarter-percentage point increments since December, bond traders are pricing in less than a 50 per cent chance of another shift higher in overnight borrowing costs this year. A modest tightening cycle has failed to sustain the dollar, which peaked at the start of the year.

In contrast, stronger eurozone growth that has spurred expectations of less accommodative monetary policy in the coming year has buoyed the euro.

The currency market will focus on remarks from Mario Draghi, European Central Bank president, who speaks after Ms Yellen on Friday at the Jackson Hole gathering. Traders have noted recent concerns amongECB officials that the euro’s stellar run for much of this year is tightening financial conditions for the region.

The dollar index remains on track to close out August with a modest gain after falling in each of the preceding months since March, reflecting a pullback by the euro.

More broadly, the dollar has enjoyed a bounce this month against many other currencies with the exception of the Japanese yen, Mexican peso and Swiss franc.

John Hardy, head of forex strategy at Saxo Bank, said: “If Yellen simply stays on message by insisting that the Fed remains on track to unwind policy slowly, it would be marginally hawkish and US dollar supportive.” Beyond Jackson Hole, the market will “have to wait for more incoming data and new developments for the next significant fundamental driver”.

Some believe that the dollar’s recent reprieve will not last.

Lee Hardman, currency analyst at MUFG, said the dollar would remain under pressure in the coming weeks, held back by continued political uncertainty such as the looming extension of the US debt ceiling in the autumn.

“The US dollar has weakened in the run-up to the previous two debt ceiling stand-offs and thereby poses some downside risk for the US dollar in the coming months,” he said.