Dollar Rises Before Fed as U.S. Inflation Gain Exceeds Forecast

  • Greenback climbs on higher interest-rate-increase outlook
  • Goldman's Robin Brooks says tightening may spark 15% rally

Has the Federal Reserve Already Achieved Its Mandate?

The dollar rose for the third day before the Federal Reserve unveils its policy decision and shines light on the future path for interest-rate increases.

The U.S. currency gained against most of its 16 major peers before Fed Chair Janet Yellen has an opportunity to clarify the central bank’s rate outlook when a two-day meeting ends Wednesday. The dollar may strengthen as much as 15 percent if the Fed continues to tighten, Goldman Sachs Group Inc. analysts including Robin Brooks wrote in note.

The greenback has weakened this year as uneven economic growth and a slowdown in China roiled markets in the first few weeks of 2016. Consumer prices in the U.S., excluding food and fuel, climbed more than forecast in February for a second month, adding to signs inflation is moving closer to the Fed’s 2 percent target. 

"If the market believes at the next meeting the Fed could tighten, and really believes that, then I think the dollar will zoom ahead," Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank AG, said on Bloomberg Television. "Otherwise, you may actually have to wait until June for that.”

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, advanced for a third day, gaining 0.3 percent as of 11:22 a.m. New York time. The gauge has slumped since rising in January to its highest level in more than a decade.

The dollar climbed 0.5 percent to 113.71 yen after dropping 0.6 percent during the previous two days. The U.S. currency gained 0.4 percent to $1.1064 per euro.

Fed Outlook

Traders expect almost a zero likelihood the Fed will raise interest rates at the meeting ending Wednesday, following an increase in December that was the first in almost a decade. Officials will update the dot plot, or outlook for the expected path of the benchmark rate. The median rate-hike outlook by officials in December was for four increases in 2016.

The odds of an increase by the June 14-15 meeting are 55 percent, up from as low as 2 percent probability on Feb. 11, according to data compiled by Bloomberg based on fed fund futures. The probability of an increase by year-end is 83 percent.

“We are biased toward dollar gains as the market prices a steeper path for rates,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London. The Fed will say “that all options are still open -- including the outside possibility of an April hike and that the default position should be a June hike. The implied probability of those two events is still too low in our view,” he said.

Before it's here, it's on the Bloomberg Terminal.