Currencies: Dollar posts strongest monthly gain against yen in 18 months

After a rocky start to the year that saw the dollar weaken precipitously against many of its rivals, the U.S. currency managed to bounce back in May.

The U.S. currency on Tuesday posted its strongest monthly gain against the yen in 18 months, while also rising sharply against a host of other rivals, as shifting expectations for the pace of impending Federal Reserve interest-rate hikes helped support the greenback.

One dollar was buying USDJPY, -0.35%  ¥110.57 late Tuesday in New York, putting it on track for a monthly gain of 4%. By comparison, it traded at ¥110.95 late Monday in New York.

The ICE U.S. Dollar index DXY, +0.11% a measure of the buck’s strength against a basket of six rivals, was up 0.3% at 95.8260 on Tuesday for a monthly increase of 3%. The index is down 2.9% for the year to date, while the dollar is down more than 8% versus the yen since the end of 2015.

A host of Fed speakers—including, last Friday, Fed Chairwoman Janet Yellen—repeatedly warned that the next rate increase could come in the next few months, causing market-based indicators to show a dramatic rise in the likelihood of a summer hike.

Traders in the Fed funds futures market were recently pricing in a 58% probability of a hike at the Fed meetings in June or July, up from 28% a month ago.

These comments were reinforced by a host of strong economic data showing that U.S. growth picked up in the second quarter after a weak start to the year. Also, minutes from the Fed’s April policy meeting showed a majority on the central bank’s rate-setting committee would support a hike at its June meeting provided the data remain robust.

Data released Tuesday showed consumer spending jumped 1% in April, while the PCE price index, a widely watched gauge of inflation preferred by the Fed, showed prices rose 1.1% in the past 12 months. U.S. home prices rose 0.9% in March, more than economists expected.

Meanwhile, a report on Chicago-area economic activity showed weakness in May. The Chicago PMI fell 1.1 points to 49.3, the lowest level since February and the sixth time in 12 months it’s come in below 50, indicating contraction.

The data “feeds into the idea of a Fed hike in the months ahead and into the concepts of an improving economy in Q2, all of which is important for the dollar,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

Investors are now bracing for a busy economic calendar in the week ahead, with an important reading on monthly jobs growth in May expected Friday.

If the data add to the picture of vibrant economic growth, expect to see the dollar strengthen further, Esiner said.

In other currency trading, the euro EURUSD, -0.0539%  logged a monthly decline of 2.7% against the dollar—its biggest in six months. The shared currency traded at $1.1138 late Tuesday, compared with $1.1144 late Monday in New York.

The British pound GBPUSD, -1.1066%  traded at $1.4485 late Tuesday in New York after a new poll of U.K. voters showed a majority of respondents would prefer to leave the European Union. The sharp drop left the U.K. currency down 0.9% against the dollar for the month.

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