Fed rate hike expectations jolting currencies

U.S. fifty dollar bills are run through a counting machine inside a currency exchange store in Mexico City, Mexico.
Susana Gonzalez | Bloomberg | Getty Images
U.S. fifty dollar bills are run through a counting machine inside a currency exchange store in Mexico City, Mexico.

The dollar is flexing its muscles again, now that Fed officials are suggesting a rate hike may come sooner rather than later.

The dollar firmed as commodities sold off, sending the dollar index up 0.5 percent to just above 96. Platinum plunged more than 3.5 percent in its worse sell-off since January, while gold lost about 2 percent to $1,223 per troy ounce.

Both the Mexican peso and Canadian dollar were down more than 1 percent against the greenback. Oil was also weaker. West Texas Intermediate futures lost 4 percent, closing below the key $40 level — at $39.79 per barrel.

The dollar index has been moving higher since March 18, two days after the Fed met and sent a seemingly dovish message to markets. But more recent hawkish comments from Fed officials have helped give the dollar a lift in a fairly dramatic move against a basket of currencies as traders reassess interest rate expectations.

Read MoreFed Chair Yellen has a mini-revolt on her hands

St. Louis Fed President James Bullard was the latest to join a growing chorus of Fed officials who say it's time for the Fed to move.

"We didn't do it, so now we can look at April and see what the data look like when we get to April," Bullard told Bloomberg News on Wednesday. His comments came shortly after Philadelphia Fed President Patrick Harker said the Fed should consider another hike as soon as next month.

Read MoreMarkets getting ready for a Fed rate hike soon

Bullard, a voting member, had said less than a month ago, however, that it would be "unwise" to move any further due to weak inflation and global volatility. But markets have since calmed, data is improving, and the Fed's inflation measure, the PCE deflator rose to 1.7 percent, close to its 2 percent target.

"The dollar move is the unwind of the trade the other way. We had a huge move in commodities that hurt the dollar. Part of this is that adding a little bit of fuel to the fire," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management.

Schlossberg said it appears that central banks are coordinating their policy banter, following last month's G-20 meeting.

Read MoreHow Singapore's sovereign fund sees U.S. stocks

"It's hard to say with any degree of certainty," he said. "The Chinese started to accommodate their policy. The Europeans went out and did a major QE. The U.S. officials issued a dovish statement because they didn't want the dollar to get too strong, but ultimately the fundamentals argue for them to move policy. If they make the claim they are data dependent they have to follow the data."

Brown Brothers Harriman chief currency strategist Marc Chandler said the dollar is rising in part on rising inflation expectations. "You've had three regional Fed surveys for the month of March all stronger than expected," he said. "Plus four or five Fed officials have sounded like they want to raise rates."

He said the market now puts odds of an April move at near 15 percent. But while those odds are still low, the Fed may want to act so as not to lose credibility.

Read MoreHow stocks react amid confusing Fed messages

"I've been arguing the Fed can't go in April because they want to put their spin on it, but they're paying attention to this loss of credibility issue," he said.

The June meeting has been seen as the more likely time for a rate hike because Fed Chair Janet Yellen holds a press briefing after it. However, Yellen has previously said an impromptu news conference could be scheduled.

"I think this credibility issue is sufficient and economic data is stronger. Core PCE deflator was 1.7 percent," Chandler said. "The Fed may under promise and over deliver."

Schlossberg said the Fed may want to vary its message.

"It's been difficult to interpret this. They don't want a huge move all at once. They want to keep the markets guessing," he said. "The mixed message is the new transparency."