Deutsche Bank Says Dollar Poised for Gains as Fed Hike Possible

  • Ruskin says better financial conditions underpin outlook
  • Fed’s John Williams says a 2016 rate rise could be appropriate

Deutsche Bank AG, the world’s No. 4 currency trader, says the prospects for gains in the dollar are increasing as improving financial conditions add to the case for the Federal Reserve to raise interest rates this year.

The greenback rose against all except three of its 31 most-traded peers as the fallout from Britain’s June 23 referendum to leave the European Union continued around the globe. In the U.S., traders are anticipating the June payrolls report later this week, forecast to show gains of 180,000 jobs, will shape Fed policy makers’ views after a below-forecast May report. Fed Bank of San Francisco President John Williams said Britain’s vote to exit probably won’t derail the U.S. economy and a rate increase is still possible this year.

"The dollar should be stronger against the euro and commodities currencies and emerging-market currencies," said Alan Ruskin, global co-head of foreign-exchange research at Deutsche Bank in New York. Gauges of financial conditions "have improved markedly since December and sharply since their low point. That raises the stakes for the upcoming payroll."

Ruskin forecasts the U.S. currency will strengthen to $1.05 per euro by the end of the year. That is stronger than the median estimate of $1.09 in a Bloomberg survey of analysts.

Even with the fallout from the Brexit vote, financial conditions have improved since the Fed raised rates in December, according to Deutsche Bank. That helps to explain why the bank projects that a compelling U.S. jobs report along with improving global manufacturing data may boost the chances of a Fed hike, which have fallen from 50 percent before the U.K. vote. As of Tuesday, Fed funds futures show a 10 percent chance of a rate increase by December.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.8 percent as of 5 p.m. in New York. The greenback added 0.7 percent to $1.1076.

Williams, who next votes on policy in 2018, said he still expects the unemployment rate to drop to 4.5 percent this year and for inflation to continue to move up. If that outlook comes to fruition, a rate hike would be appropriate this year, though he declined to “get into projections about when and what.”

The dollar rose along with the yen on haven demand. Bank of England Governor Mark Carney said actions from the central bank cannot fully offset Brexit volatility, as the pound slid to the lowest in more than three decades against the dollar. Treasury yields tumbled to record lows, while crude oil and stocks declined.

"It’s clear uncertainty is not good for business confidence," said Vassili Serebriakov, foreign-exchange strategist at Credit Agricole SA in New York. "Risk sentiment is under pressure. The U.S. dollar will continue doing well. We’re seeing negative spillover into the euro from the pound."

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