Interest rates are rising on Wednesday and yet, mysteriously, the U.S. dollar is moving in the opposite direction.
Though they are still low by historic standards, yields on U.S. bonds are higher than those in other places, particularly other industrialized countries. That helped the dollar soar close to its 12-year high as recently as a month ago.
According to Kathy Lien, FX strategist at BK Asset Management, the dollar selloff has a lot to do with how the market anticipates the Fed's next move.
"Traders are still very short euros," she said. "They're unwinding those positions, thinking that the Fed could take the June rate hike off the table."
However, not all traders are moving to sell their dollar positions, according to Stacey Gilbert, head of derivative strategy at Susquehanna. She notes activity in the dollar index bullish ETF (trading under the symbol UUP). On Tuesday, one trader bought 25,000 contracts of the 25.50-strike calls expiring next week. As calls are bullish bets giving purchasers the right to buy shares at a set price within a specific timeframe, the trader is looking for a 1 percent move in the dollar over the next few days.
"We're seeing investors actually build more bullish dollar positions here," Gilbert said. "While the Fed may not actually give us a huge event here in terms of a movement in the dollar, we do have nonfarm payrolls [to be released next Friday] as well."
The Federal Reserve is set to release their latest policy statement at 2 p.m. ET on Wednesday.
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