Dollar's Best Week in Six Months May Just Be as Good as it Gets

  • Economic reports signal end to currency's rebound from lows
  • Traders see 50-50 chance of interest-rate increase this year

The dollar’s biggest gain in six months may run out out fuel as reports from sectors of the U.S. economy keep pointing to sluggish growth.

The Bloomberg Dollar Spot Index that tracks the currency versus 10 peers rallied this week from a one-year low, shrugging off a patchy jobs report. The employment data prompted Goldman Sachs Group Inc. to push back its call for the Federal Reserve’s next rate increase to September from June. The greenback rebounded after a momentum indicator slumped to a level some analysts see as a sign the currency has moved too far, too fast and was due a reversal.

The currency may struggle to repeat its winning week as investors digest a raft of disappointing data on the economy, from manufacturing to jobs. Traders about a 50 percent likelihood of a rate increase this year, and only an 8 percent probability of a move in June, dimming the prospects for the relative allure of the dollar.

“We’re likely to see the dollar weaken slightly as the expectations about the Fed continue to get pushed out,” said Kate Warne, a St. Louis-based investment strategist at Edward D. Jones & Co. “Many are thinking that the Fed may not move this year at all. Friday’s payrolls report doesn’t indicate that, but certainly we’re getting more and more commentary about that.”

Bloomberg’s gauge of the dollar added 1.5 percent from a week earlier, climbing the most since November. The greenback rose 0.4 percent to $1.1404 per euro and gained 0.6 percent to 107.12 yen.

The dollar gauge’s 14-day relative strength index on Monday fell below the 30 level that indicates an extended move. It has since rebounded to 49.

Payrolls Pain

Hedge funds and other large speculators boosted bets against the dollar to the highest since April 2014 as of May 3, after turning net bearish last month, Commodity Futures Trading Commission data show.

Citigroup Inc.’s economic surprise indicator -- which tracks whether reports beat or miss estimates -- slumped to its lowest since February on Friday, after the jobs report showed employers added fewer workers than forecast in April. That followed a lower reading on manufacturing by the Institute for Supply Management earlier in the week. Gross domestic product growth slowed to a 0.5 percent annual rate in the first quarter.

Traders scaled back expectations for rate increases in response, but perhaps too severely, according to Mike Materasso, co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York, who still expects one or two increases this year.

Materasso, a dollar bull, expects the greenback to continue to struggle in the next few weeks. “Given the data, in the near term, it’s hard to make a case for dollar strength,” he said.

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