For Currency Traders, All Eyes on Inflation Before Fed Liftoff

Do we have liftoff?

That’s the question currency traders will be asking next week as they weigh Wednesday’s U.S. inflation data and minutes from the Federal Reserve’s latest meeting for clues about the timing of the central bank’s first interest-rate increase in almost a decade. The data follow a topsy-turvy week of dollar gains and losses after China unexpectedly devalued its currency, roiling global financial markets.

“Wednesday’s going to be the big day,” Jennifer Vail, head of fixed-income research in Portland, Oregon, at U.S. Bank Wealth Management, said by phone Thursday. For the dollar, “it’s going to be driven by Fed policy and by economic data.”

The Bloomberg Dollar Spot Index dropped 0.3 percent this week, its worst since June, giving back its early August gains. The U.S. currency fell 1.3 percent to $1.1109 per euro and was little changed at 124.31 yen.

The prospect of the Fed hiking rates, in contrast to many of its global counterparts who are easing monetary policy, has boosted the dollar by about 20 percent in the past year. That makes it the best performer among 10 developed-nation peers, according to Bloomberg Correlation-Weighted Currency Indexes.

“We remain bullish on the dollar,” Valentin Marinov, head of Group of 10 foreign-exchange strategy at Credit Agricole SA, said by phone from London Friday. “The dollar tends to outperform broadly on a trade-weighted basis in the run up to, and during the early stages of, the Fed tightening cycle.”

Hike Odds

Traders Friday were pricing in a 48 percent probability that the Fed will boost borrowing costs in September, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. That compares with 54 percent a week earlier.

Expectations fell after China devalued the yuan, sparking concern that slowing growth in the nation will hurt the global economy. The surprise move initially drove investors to seek haven in the U.S. dollar.

New York Fed President William C. Dudley said Aug. 12 he’s hopeful that the Fed will be able to raise rates “in the near future.” The Federal Open Market Committee next meets on Sept. 16-17 and minutes from its July gathering will be released on Aug. 19.

The U.S. consumer-price index probably rose 0.2 percent in July, according to the median estimate of 62 analysts surveyed by Bloomberg. Prices climbed 0.3 percent in June. The Fed is looking for signs that inflation will strengthen toward its 2 percent year-over-year goal before it starts to increase rates.

“A large part of the current inflation is temporary,” Fed Vice Chairman Stanley Fischer said in an Aug. 10 interview. After the effects of cheaper oil and other raw materials dissipate, “these things will stabilize at some point, so we’re not going to be as low as we are forever.”

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