Dollar Climbs as Retail Sales Add to China’s Yuan-Support Signal

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The dollar strengthened as a rebound in retail sales and Chinese reassurances on the pace of yuan devaluation supported the case for higher U.S. interest rates.

The U.S. currency extended gains after a report showed growing consumer demand for everything from cars to clothing as Federal Reserve policy makers consider timing for the first rate increase in almost a decade. China’s central bank said it will step in when its currency market is excessively volatile after the yuan’s biggest two-day drop since 1994.

“The consumer is starting to participate in domestic economic growth,” Jennifer Vail, head of fixed-income research in Portland, Oregon, at U.S. Bank Wealth Management, said by phone. “The renminbi may fall a bit further in the next few days, but the bulk of the depreciation’s already taken place. Dollar strength, on the other hand, is going to be more tied to as the market realizes that September’s still on the table.”

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major peers, climbed 0.3 percent to 1,207.50 as of 5 p.m. in New York. It dropped Wednesday to the lowest since July 31.

The U.S. currency advanced 0.1 percent to $1.1150 per euro and climbed 0.2 percent to 124.43 yen.

Fed Probability

Currency volatility fell Thursday after its biggest two-day increase since January, JPMorgan Chase & Co.’s global index of foreign-exchange price swings shows.

Retail sales rose 0.6 percent in July, up from a month earlier and in line with forecasts. The Fed meets Sept. 16-17 to revise monetary policy.

“Retail sales was a timely reminder that the U.S. economy is near the type of health that the Fed wants to see before raising rates,” said Joe Manimbo, an analyst at Western Union Business Solutions, a unit of Western Union Co., in Washington. The report “helps tamp down global worries and puts the focus back on U.S. optimism.”

There’s a 50 percent probability the Fed will raise its benchmark rate in September, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. That compares with 40 percent on Tuesday, when China’s decision to devalue the yuan led to concern the world’s second-largest economy is slowing.

Chinese policy makers said in a rare news conference on Thursday that there’s no basis for yuan depreciation to persist and policy makers will step in to control large fluctuations.

The yuan slipped 0.2 percent, with at least one major Chinese bank selling dollars to influence the closing level, according to traders. The nation lowered the reference rate for the yuan by 1.1 percent to 6.401 per dollar on Thursday. It reduced it by a record 1.9 percent on Aug. 11.

“We’re returning to some sense of normalcy right now and focus has again shifted away from China,” said Chris Gaffney, president at EverBank World Markets in St. Louis. “We’re back to thinking ’well, with this economic data, the Fed may go ahead and step-in in September’ and that certainly has boosted the dollar up.”

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