The U.S. currency hit its highest level in three weeks on Monday, reflecting expectations that the Federal Reserve could increase short-term interest rates as soon as next month. Higher rates make dollar-denominated assets more attractive.
Traders are on the lookout for signs the dollar could surge further against the yen, euro and some emerging-market currencies. Currency gains this year have hampered sluggish economic recoveries in many nations. The Wall Street Journal Dollar Index is down 4% in the year to date, confounding many analysts who predicted the dollar would rise in 2016.
Bets on a stronger dollar stood at $7.18 billion in the week ended Aug. 23, down from nearly $15 billion in late July, according to data from the U.S. Commodity Futures Trading Commission and Scotiabank.
Investors are “underexposed to the U.S. dollar right now,” said Shaun Osborne, chief FX strategist at Scotiabank.
Any large currency shifts could roil other asset classes, from U.S. stocks to emerging-markets bonds to many commodities, that have benefited from the dollar’s weakness.
One potential catalyst: A strong U.S. payroll number this Friday could bolster the case that Fed officials have recently made for higher rates. Last Friday, Chairwoman Janet Yellen and Vice Chairman Stanley Fischer said the economy was strong enough to warrant the first increase in the federal-funds rate this year. The comments spurred the biggest one-day rally in two months in the WSJ Dollar index, which tracks the value of a basket of 16 currencies.
“We have a period of dollar strength ahead,” said Daniel Katzive, head of FX strategy for North America at BNP Paribas.
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