Dollar Looks Good to Citigroup as Fed Watch Enters Final Week

  • Currency advances for first time in three days versus euro
  • Futures show 78% likelihood that Fed will act on Dec. 16

With less than a week until the Federal Reserve meets, now’s a good time to buy the U.S. dollar, according to Citigroup Inc.

The greenback is “attractive” after a reversal, Steven Englander, the bank’s New York-based global head of Group-of-10 currency strategy, wrote in a note. The dollar advanced versus most of its major peers Thursday, lifting the Bloomberg Dollar Spot Index from near its lowest in a month.

Longer-term investors are considering just how much the dollar can weaken “and trying to gauge their own positioning on that basis and when to come in,” said Englander, whose bank is the world’s largest foreign-exchange trader, according to Euromoney. “Roughly speaking, we probably could see the dollar come close to 10 percent over the next 12 months.”

Currency traders are weighing the impact of an expected interest-rate increase when the Federal Reserve meets next week. While higher rates typically encourage a stronger currency, the U.S. currency has already rallied 10 percent in the past year, fueling an influx of money into trades that benefit from a higher dollar. 

That’s prompted some consolidation in recent weeks as debate turns to the path of rate hikes after liftoff.

Market Timing

The Bloomberg Dollar Spot Index, which tracks the currency versus 10 counterparts, gained 0.4 percent to 1,225.41 as of 5 p.m. in New York. The greenback rose for the first time in three days versus the euro, adding 0.8 percent to $1.0941 per euro. It advanced 0.1 percent to 121.56 yen.

Futures contracts show a 78 percent probability that the central bank will raise borrowing costs for the first time since 2006 on Dec. 16. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

Wagers on dollar strength versus eight peers rose to the highest in three months in the week ending Nov. 24. Investors pared positions before the European Central Bank meeting on Dec. 3. Investors further cut bets on dollar gains versus the euro that day, by the most in almost two years, Englander wrote in the note, citing Citi data.

Divergence between U.S. monetary policy and other major central banks will support the dollar in 2016, he wrote, and the Fed will likely raise rates faster than the market is pricing, boosting the currency.

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