Dollar Climbs Before Data Forecast to Show Growth Remains Intact

  • Still attractive to sell euro vs dollar, says SEB's Hammer
  • Market underpricing prospect of higher rates: Aletti Gestielle

The dollar advanced before reports on Wednesday that economists forecast will show U.S. economic growth remains intact, adding support to San Francisco Federal Reserve President John Williams’ comments that two or three interest-rate increases this year was a reasonable call.

The greenback rose against 13 of its 16 major peers, gaining the most versus the Swiss franc, as traders judged its recent weakness as overdone. Data on Wednesday will show a rebound in retail sales and an acceleration in factory-gate inflation, according to economist forecasts compiled by Bloomberg. While the International Monetary Fund cut its 2016 world expansion forecast, it predicts the U.S. economy will grow faster than Japan’s.

The recent setback in the dollar was “a blip,” said Carl Hammer, chief currency strategist at SEB AB in Stockholm. “U.S. economic growth is OK, and the Fed will raise interest rates in September while the European Central bank continues with stimulus. Hence, the euro is still an attractive sell against the dollar up toward $1.15.”

The dollar appreciated 0.7 percent to $1.1302 per euro as of 7:36 a.m. New York time. It climbed 0.8 percent to 109.36 yen, in the biggest back-to-back increase since February.

Fed Outlook

The dollar has fallen about 9 percent this year versus the yen as the Fed has pared projections for the pace of interest-rate increases, citing concern about global growth. Yet, economic reports suggested the U.S. recovery has gained traction. Richmond Fed President Jeffrey Lacker on Tuesday played down the risk posed to the U.S. from financial market turmoil and weaker growth abroad, arguing that adverse financial developments at the start of the year have “largely reversed” and that the inflation outlook “has firmed.”

“Given the extent to which global risks to the United States have subsided, prudence suggests staying the course with a gradual sequence of rate increases,” Lacker said, noting that the dollar had declined since January and its damping effects on U.S. growth “are plausibly behind us.”

Bloomberg’s dollar index climbed 0.6 percent, halting a three-day decline that saw the gauge drop by about 1 percent. It fell 4.1 percent in three months through March, its worst quarter since September 2010.

The dollar still has further to climb in the near term because the market is underpricing the prospect of higher rates, said Fabrizio Fiorini, chief investment officer in Milan at Aletti Gestielle SGR SpA, the top euro forecaster in Bloomberg’s most recent rankings.

“This rebound will continue until the bond market discounts at least one rate hike in 2016,” said Fiorini. “I think that will happen, both the rates market adjustment and the Fed hike. After that, the euro will start appreciating again toward the $1.18-$1.20 area.”

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