To foresee the dollar’s next move, BlackRock Inc. is following the Federal Reserve in parsing economic releases for signs U.S. growth has recovered enough for higher rates.
“For another major leg up in the dollar, you’d have to see another leg up in the data for the U.S. -- both for the Fed to come in and validate it and for the market to move on its own,” Peter Fisher, senior director at the BlackRock Investment Institute, said at a briefing in New York on Monday. “Dollar strength is not a straight line.”
After a meteoric rise that saw the dollar climb 11 percent in 2014, appreciation stalled this year as weaker-than-forecast economic reports prompted policy makers to lower their rate projections. Currency traders are scrutinizing each and every release for signs that weakness was short-lived, with data on July 17 forecast to show core inflation accelerating.
“You are now going back to more of the environment that was envisioned in the beginning of 2015, where the U.S. looks stronger on a relative basis, the Fed is almost certain to be the first central bank to tighten monetary policy and, daily wiggles aside, that should provide more of a supportive backdrop to the dollar,” Russ Koesterich, global chief investment strategist at BlackRock, the world’s largest money manager, said at the briefing.
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 of its major peers, climbed 0.5 percent to 1,195.16 in New York. It’s slipped from a more-than-a-decade high of 1,222.94 on March 13.
Improving growth and a gradual pick-up in inflation should also support a moderate move higher in government debt yields.
Fed funds futures show a 31 percent chance the central bank will increase its benchmark rate in September from virtually zero, down from 33 percent on July 10, according to data compiled by Bloomberg.
“Rates will continue to back up a little bit in the second half of the year,” Koesterich said. “Our base case is not a melt up in rates, but more this kind of grinding higher that we saw during the first half of the year. We should expect much more bond-market volatility.”