Investing.com -- The U.S. Dollar Index rallied on Friday from near two-month lows from the previous session, as investors digested a fresh batch of comments from key Federal Reserve policymakers on the possibility of a near-term interest rate hike by the U.S. central bank.
The index, which measures the strength of the greenback versus a basket of six other major currencies, rose as much as 0.40% on Friday before ending the U.S. afternoon session at 94.48, up 0.0029 on the day. With the sharp gains, the index is on pace to end a five-day losing streak. The index has plummeted more than 2.15% over the last month and has fallen by more than 4.3% since the start of the year.
Foreign exchange traders could be bracing for a period of cautious, sideways trading next week, ahead of Fed chair Janet Yellen's appearance at a closely-watched speech next Friday in Jackson Hole, Wyoming. The comments from the Fed chair could shed light on the U.S. central bank's opaque long-term monetary policy forecast, which has been clouded by diverging views from participants over the last few weeks on the timing of its next rate hike. When the minutes from the Federal Open Market Committee's (FOMC) July meeting were released on Wednesday, some participants felt that it could be appropriate to raise short-term rates in the coming months, while others were more hesitant due to below target inflation. The FOMC's benchmark Federal Funds Rate has remained at a range between 0.25 and 0.50% in each of their five meetings in 2016.
On Friday, Federal Reserve of Dallas president Rob Kaplan said the Fed's decision could be complicated by a low neutral rate, which takes into account the Federal Funds Rate minus a measure of inflation. Kaplan's comments counter a hawkish position laid out by San Francisco Fed president John Williams on Thursday, who warned that delaying an interest rate hike could have detrimental effects for the economy. Earlier this week, New York Fed president William Dudley said the timing could be right to consider raising interest rates again, while St. Louis Fed president James Bullard reiterated a previous stance that the Fed may only need to approve a single rate hike of 25 basis points over the next three years. Skeptical of a possible head-fake from the Fed, numerous market players have shrugged off the hawkish minutes this week.
Any rate hikes by the Fed this year are viewed as bullish for the dollar as investors pile into the greenback in order to capitalize on higher yields.
Elsewhere, Downing Street officials said Friday that Britain prime minister Theresa May will not trigger formal proceedings to leave the European Union until at least the start of 2017. GBP/USD fell more than 0.70% to 1.3076.
Meanwhile, investors increased their short positions on the British Pound by 4,500, according to weekly Commitments of Traders data from the U.S. Commodity Futures Trading Commission (CFTC), to a record-high of 130,100. At the same time, short positions in the euro fell by 3,300 on the week against the U.S. Dollar to a gross of 195,600. EUR/USD fell by 0.26% to 1.1324, but remained near a 1-month high. USD/JPY rose by 0.32% to 100.21, hovering near 1-year lows.
Yields on the U.S. 10-Year rose by four basis points to 1.58%, while yields on the Germany 10-Year gained five basis points to Minus-0.04%. Yields on both 10-year government bonds are down by more than 50 basis points over the last year.