The US dollar hit its highest level against the euro in more than three weeks on Wednesday and crossed 110 yen for the first time in nearly three weeks after Federal Reserve meeting minutes signalled a June interest rate hike was on the table. The Fed will likely raise interest rates in June if economic data point to stronger second-quarter growth as well as firming inflation and employment, according to minutes from the US central bank's April policy meeting released on Wednesday.
Fed funds futures, based on the CME Group's FedWatch tool used to gauge the probability of rate hikes, moved to price in a 34 percent chance of a June hike, up from 19 percent in morning trading. The probability for a September hike rose to 68 percent from 57 percent, while the probability of a December hike rose to 80 percent from 74 percent. "Investors are now increasing the possibility of a June hike," said Chris Gaffney, president of EverBank World Markets in St. Louis. "The Fed is saying that the markets are too pessimistic."
The euro was last down 0.8 percent at $1.1220, its lowest level since April 25, and was set to post its biggest one-day percentage drop against the dollar in five weeks. The dollar gained 1 percent against the yen to a nearly three-week high of 110.23 yen and was set to post its biggest daily percentage gain against the Japanese currency in more than a week. The greenback was last up 0.66 percent against the Swiss franc at 0.9866 franc after hitting a nine-week high of 0.9874 franc.
Gaffney said traders were giving the minutes more credibility as a signal for a June rate hike, given that they preceded strong April US inflation and housing starts data as well as a push higher in oil prices. The June 2016 Fed fund futures contract price dropped 2 basis points after the minutes were released, marking the largest one-day drop since late February. The dollar could rally further if US data continues to come out strong and reinforces expectations of a June rate hike, said David Gilmore, partner in FX Analytics in Essex, Connecticut. The dollar index, which measures the greenback against a basket of six major currencies, hit a nearly five-week high of 95.198. The index was set to post its biggest daily percentage gain in five weeks.
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