Dollar bulls fight back with help from Fed

Fed to see 'shallowest' hiking cycle ever: StanChart

The dollar hit a six-week high against other major currencies on Thursday, a day after hawkish comments from the Federal Reserve put a September interest-rate rise back on the table.

In a testimony to Congress, Fed Chair Janet Yellen on Wednesday reiterated that a rate rise was likely this year. She added that every Fed meeting was a "live meeting" where action could take place and said that waiting much longer could mean "faster rate rises."

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Dollar bulls took their cue from those comments, pushing the dollar index to about 97.50 – its highest level in six weeks. The dollar index measures the dollar's value versus other major currencies.

"One of the key things Yellen pointed out is that the Fed would prefer to raise rates sooner rather than later," Piotr Matys, a currency strategist at Rabobank in London, told CNBC.

"We still think the Fed will move in December but the market is once again pricing in a September rate move."

Some signs of weakness in the economy – notably a softer-than-expected June nonfarm payrolls report – dampened expectations for a September rate rise and in turn dented the dollar.

Higher U.S. interest rates are seen as bullish for the dollar, drawing in cash from abroad at a time when other major central banks continue to cut interest rates. The Bank of Canada, for instance, cut its key rate by a quarter percentage point to 0.5 percent on Wednesday to support growth.

Paul J. Richards| AFP | Getty Images

"It will be the shallowest (tightening) cycle in Fed memory, but it will lift off in contrast with what's happening elsewhere," Callum Henderson, head of currency research for Standard Chartered told CNBC Asia on Thursday.

"It is modestly bullish for the dollar heading into the rate hike," he added. "Once the Fed does hike, the market will look at how far and how fast the Fed will move and the dollar could lose momentum after that. But going into the first rate hike, who else is going to raise rates?"

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The dollar has climbed about 10 percent against the euro and about 3.5 percent against the so far this year, with an upward trek slowing in recent months amid jitters over Greece and mixed U.S. economic data.

"Of course, the Greece crisis has not had a significant impact on U.S. markets so far but if that changes so could her (Yellen's) views. In the meantime, we expect further gains in the dollar," Kathy Lien, managing director of currency strategy for BK Asset Management, said in a note.