US Treasury and Federal Reserve support for the dollar will provide some support to the US currency in the short term with volatility liable to increase.

From lows around 1.5840 on Monday, the dollar stabilised around 1.58 in Europe. The US currency secured some buying support in early New York as energy prices corrected lower from Friday’s surge. The US economic data recorded a stronger than expected increase in pending home sales of 6.3% for April after a 1.0% decline the previous month. Although there will still be a very high degree of caution, the tentative evidence of firmer demand provided some currency relief.

US yields had already moved higher and the Fed futures contract moved to show over an 80% probability that interest rates would be increased by November. The hardening of yields underpinned the dollar and the currency also gained ground on supportive comments from US officials.

Treasury Secretary Paulson also stated that he would not take currency intervention or any other policy tool off the table. Fed Chairman Bernanke stated that there was a reduced risk of a substantial downturn in the economy while he also warned that the Fed would strongly resist any erosion of inflation expectations.

The tough Fed stance and warning over the dollar’s level will provide some near-term currency support with speculation over intervention and the dollar pushed to beyond 1.56 with highs near 1.5500 on in Europe on Tuesday.