• U.S. inflation, retail sales figures to guide greenback path
  • Market underpricing potential for Fed rate increase, AXA says

Currency traders are going back to basics, set to watch the performance of the U.S. economy more closely than political events to discern the dollar’s direction.

A gauge of the greenback posted a weekly gain as a report showed the U.S. June jobs growth exceeded forecasts by more than 100,000, raising the likelihood of a Federal Reserve interest-rate increase this year. Investors in the $5.3-trillion-a-day currency market will parse inflation and retail sales data next week for more signs that the economy can withstand higher borrowing costs.

“If the data is strong enough to pull Fed expectations forward meaningfully, that would validate a stronger dollar on a sustained basis,” said Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank AG, the world’s fourth-biggest currency trader, according to Euromoney magazine. “The debate in the marketplace is: Is this data strong enough to pull the Fed into play, or does it just suggest the economy is growing at a reasonable pace, but the Fed is not going to tighten anytime soon.”

More scope for the Fed to raise rates rekindles speculation of increased dollar allure based on tighter monetary policy in the U.S. while central banks in Europe and Asia add to stimulus. That sentiment fueled a 20 percent gain the dollar the past two years before the greenback slumped this year as the outlook for divergence dwindled.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.3 percent this week. The greenback added 0.8 percent to $1.1051 per euro, while falling 1.9 percent to 100.54 yen.

Hedge funds and money managers trimmed net bullish futures positions on the dollar versus eight major peers last week, according to the Commodity Futures Trading Commission. Bets that the currency will rise outnumbered bearish wagers by 81,952 contracts in the week to July 5, compared with 96,184 the previous week.

Traders see a 21 percent probability the central bank will raise interest rates by year-end, up from 12 percent Thursday, as the U.S. economy appears more resilient in the face of global headwinds.

“Moderate growth and signs of fading spare capacity look set to drive the Fed to tighten rates again before year-end, something markets do not fully price at this time,” said David Page, a senior economist at AXA Investment Managers in London, which manages 666 billion euros ($735 billion).

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