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Talking Points:

• US Dollar outperforms as Fed rate hike speculation gathers steam

• Aussie, Kiwi Dollars face selling pressure on shifting yield spreads

• Yen veers away from sentiment cues as US yields take center stage

The US Dollar traded broadly higher against its major counterparts on building FOMC rate hike speculation ahead of a much-anticipated Janet Yellen speech on Friday. Investors appear to be driven by a conspicuous about-face in rhetoric from San Francisco Fed President John Williams, whose pronouncements are closely monitored because the markets see him as a close confidant of the Fed Chair.

Williams unveiled a decidedly dovish essay early last week, driving the greenback lower. He rushed to reposition by Thursday however, speaking almost as though he had been chastised to get back in line. Williams said he would prefer to hike rates “sooner rather than later” and even echoed hawkish comments from New York Fed President Bill Dudley expressing concern about the markets’ under-pricing of rate hike probability.

The Australian and New Zealand Dollars facedoutsized selling pressure as the prospect of nearing Fed tightening weighed heaviest on the yield-sensitive high beta FX space. Interestingly, the Japanese Yen is also on the defensive. It appears as though the typically anti-risk currency is finding greater momentum in shifting yield expectations than sentiment trends (at least in the near term), with USDJPYtracking 2-year US Treasury yields.

Looking ahead, a quiet European and US economic calendar presents few roadblocks to continuation of established trade dynamics. Momentum may fizzle however if overnight price action turns out to reflect catch-up flows on Friday’s price action rather than a further deepening of conviction in the Fed outlook.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com