The dollar was poised for its biggest monthly gain since January after the Federal Reserve took a step closer to raising interest rates this year.
The U.S. currency strengthened against 14 of its 16 major peers as policy makers turned more bullish on employment compared with their meeting in June. The Fed made a one-word change to its language on conditions that would justify a rate increase: It needs to see “some further improvement in the labor market,” adding the modifier “some.”
“We got a broadly U.S. dollar-positive outcome from the meeting,” said Raiko Shareef, a markets strategist at Bank of New Zealand Ltd. in Wellington. The addition of the word “some” to the Fed statement “will make the two following employment reports we get more important, and strong results would support our view of a September liftoff.”
At the same time, speculation is building among traders that the dollar’s gains will become more gradual.
Its appreciation against the euro will slow “because even if the Fed hikes, it will be very cautious in terms of signaling and pre-committing to further policy-tightening,” said Petr Krpata, a foreign-exchange strategist at ING Groep NV in London. “The Fed will want to avoid a type of communication that would cause as sharp a move” as experienced by the dollar in recent months.
Krpata forecast that an increase of more than 200,000 jobs in both July and August will prompt the Fed to increase interest rates by 25 basis points in September.
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 of its major peers, has advanced 2.5 percent this month. At that pace, it would far overshoot the 4.4 percent average appreciation by year-end against the euro forecast of analysts.
The index rose 0.3 percent to 1,210.87 as of 6:58 a.m. in New York. It reached the highest on record in March this year, at 1,222.94, in data going back to 2004.
Currency forecasters have been ratcheting back expectations for gains in the dollar amid concern about persistent weakness in the economy that few had predicted.
In April, analysts were calling for the ICE U.S. Dollar Index to reach a 12-year high of 100.70 at year-end. Now they see it finishing 2015 at 97.32, according to the median estimate in a Bloomberg survey.
“The trend will be for a stronger dollar, but probably not at the pace we’ve seen,” Richard Clarida, global strategic adviser at Pacific Investment Management Co., which oversees $1.52 trillion, said Wednesday on the sidelines of the 2015 UBS CIO Global Forum in New York.
The dollar strengthened 0.2 percent to $1.0962 per euro, and 0.4 percent to 124.34 yen.
New Zealand’s dollar was the worst performer versus the greenback among Group-of-10 currencies. The kiwi dropped 0.7 percent to 66.17 U.S. cents, adding to a 0.3 percent decline on Wednesday.
Data due Thursday are forecast to show the world’s largest economy expanded at a 2.5 percent annual rate in the second quarter, according to the median estimate of economists in a Bloomberg survey.
Fed Chair Janet Yellen said earlier this month she expects the central bank to raise its benchmark rate this year, and that waiting too long to raise rates holds risks for the U.S. economy, as does tightening too quickly.
Traders are pricing in a 44 percent probability that the Fed raises rates at or before the September meeting, based on the assumption that the effective fed funds rate will average 0.375 percent following the increase.