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The Fed brought this fear back to markets this week

Traders work on the floor of the New York Stock Exchange (NYSE) as a television screen displays coverage of U.S. Federal Reserve Chairmman Janet Yellen shortly after the announcement that the U.S. Federal Reserve had hiked interest rates for the first time
Lucas Jackson | Getty Images

Now that the Fed appears ready to hike rates this summer, markets are watching how the dollar responds.

The greenback, still 3 percent lower on the year, has risen this week against most currencies after Fed officials said in their meeting minutes that they could raise rates as early as June. New York Fed President William Dudley reaffirmed that view Thursday when he said the Fed could hike rates in June or July if economic data improves as expected.

On Friday, existing home sales are expected at 10 a.m. EDT.

"It's going to be what happens overnight with the currencies…The home sales data is important but I feel like after this week, everyone's trying to get their head around what's going on with the Fed," Tom Simons, money market economist at Jefferies, said.

On Thursday, the fed funds futures market was pricing in about a 30 percent chance of a rate hike in June, compared to just 4 percent last week. Simons said a 100 percent chance was priced in for November, while just a week ago, the first full hike was not priced in until the second half of 2017.

"I think that people are pretty well comfortable with the domestic data and the Brexit thing is something that's going to be hard to get any handle on until right when it's going to the polls," said Simons.

Brexit, or the British vote on whether to remain in the European Union, is one reason economists think the Fed could put off its rate hike until after June. There was more speculation Thursday that July or September could be the time because of Brexit, which Dudley said complicated the Fed's decision. The Brexit vote is June 23, about a week after the Fed meets.

Simons said traders would focus on how the markets adjusted to this week's news flow. Options and futures expiration in equities also come Friday.

"The only near-term monitor we have is volatility caused by currency movements and the volatility of the dollar," he said.

The dollar's swift rise in 2014 and into 2015 was a concern, as it drove commodities prices lower and hurt emerging market economies while also raising their debt burden. In the U.S., corporate profits felt the pinch from the higher dollar biting into overseas sales.

"The dollar is looking healthier, basically as you might expect," said Alan Ruskin, head of G10 currency strategy at Deutsche Bank. But Ruskin said he didn't expect quite as aggressive a move in the dollar as the last time it took off. While emerging markets were definitely hit by the higher dollar, he said he did not expect to see as much damage to risk assets as when the markets were also more worried about instability in China.

"As long as China is not solidly in the mix, then I think the risky assets won't have as quite a hard time," he said.

Ruskin said the euro could reach parity with the dollar but not likely until next year. "It probably takes two rate hikes to take it to 1.05, but it's going to need cumulative rate hikes beyond that to take us to parity and beyond," said Ruskin.

Treasury yields this week moved to higher levels, both ahead of the Fed move and after it. Yields rose across the curve this week, though they gave back some ground Thursday, with the 2-year at 0.87 percent and the 10-year at 1.84 percent. The dollar firmed against a group of currencies, including the euro, which dipped under 1.12.

Stocks sold off as the market considered the potential for a rate hike. The S&P 500 slid 7 points to 2,040 and the Dow fell 91 to 17,435. Friday will mark a year exactly since the S&P reached an all-time closing high of 2,130.

James Paulsen, chief investment strategist at Wells Capital Management, said the anticipated Fed move should give the markets more confidence, especially as global economies appeared to be picking up.

"I think you've got to give them a week or so to get okay with it. That might mean the stock market sells off, commodities sell off. People go to the dollar a bit. The undertone of growth is what's going to rule it, and it looks better and better than other parts of the world," said Paulsen. "I can see why we get a few day or maybe a few weeks of turbulence on this but I also think that change in momentum might rule the day."

Besides home sales, Fed Gov. Daniel Tarullo speaks Friday at 9 a.m. EDT to the National Association of Insurance Commissioners.

A few companies, including Campbell Soup, Deere, Foot Locker and The Buckle, will also report earnings.