Saturday, May 28, 2016

FOREX -Dollar highest in two months as Yellen sees rate hike possible

(Recasts with Yellen speech; adds quotes; updates prices)

* Dollar index rises; dollar up against euro and yen

* U.S. 1st-quarter economic growth revised upward

* Payrolls, other data in focus next week

By Karen Brettell

NEW YORK, May 27 The U.S. dollar index hit two-month highs on Friday after Federal Reserve Chair Janet Yellen left the door open to an interest rate increase in the coming months.

In remarks in Boston, Yellen said a rate increase in the coming months "would be appropriate," if the economy and labor market continue to improve.

"She didn't say no, the market took that as a positive sign for the dollar," said Boris Schlossberg, managing director at BK Asset Management in New York.

The dollar index rose 0.60 percent to 95.745, the highest level since March 29. It has surged from a low of 91.919 on May 3.

The euro eased to $1.111, the weakest level since March 16. The dollar also gained against the yen, to 110.25 yen , but remained down from last Friday's three-week high of 110.59 yen.

The dollar gained earlier on Friday after U.S. economic growth was revised upward for the first quarter.

"The headline was a little softer than expected, but not really anything that dents the outlook for what we've seen from Fed speakers, which seems to be a bit more hawkish since we've gotten the release of the April minutes last week," said Martin Schwerdtfeger, a foreign exchange strategist at TD Securities in Toronto.

The minutes from the April meeting showed that Fed officials felt the U.S. economy could be ready for another interest rate increase in June.

As recently as early May, a Fed rate hike in June was completely off the agenda. But after a string of stronger data and the Fed officials' comments, the likelihood of an increase based on Fed funds futures has reached around 30 percent.

Investors will scrutinize next week's data releases - which will culminate with the release on June 3 of the employment report for May - for further signs of whether U.S. growth is strong enough for the Fed to pull the trigger on a rate increase.

Wage growth will be a primary focus as inflation continues to improve, though it remains below the Fed's 2 percent target.

"The trajectory of inflation has clearly turned up and is being led by wage growth, which is the key determinant to the Fed wanting to raise monetary policy," Schlossberg said.

Holidays in Britain and the United States are likely to curtail volumes on Monday. (Editing by Lisa Von Ahn and Leslie Adler)


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