Dollar Holds Near 6-Week High After U.S. Data Signals Expansion

  • Upbeat housing report lifts currency against most major peers
  • Traders revive bets that the Fed will raise rates this year

The dollar held near the highest level in more than six weeks as economic data in the U.S. continue to signal expansion, setting the world’s biggest economy apart from slowing growth elsewhere around the globe.

The U.S. currency strengthened versus most of its major peers Tuesday as stronger-than-forecast construction in new homes added to evidence the economy is picking up steam. Citigroup Inc.’s U.S. Economic Surprise Index, which measures whether data beat or miss forecasts, rose to the highest since January 2015 following reports showing stronger payroll and retail sales. The International Monetary Fund scrapped its forecast for a pickup in global growth this year, while reiterating its call for a 2.2 percent U.S. growth.

Traders are reviving bets the Federal Reserve is back on track to raise interest rates, after the U.K.’s vote to leave the European Union slashed such probability to less than 10 percent. Futures prices indicate an increased probability of a rate hike by December, which would add to the dollar’s relative allure.

"We’re seeing a much stronger impulse on markets with the pick-up in U.S. data surprises --  that’s really caught the market off guard," said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank. "We are starting to shift back on the Fed story."

Bloomberg’s dollar index, which tracks the currency against 10 major peers, was little changed as of 8:11 a.m. Wednesday in Tokyo after climbing 0.5 percent in the previous session and reaching the highest since June 3. The greenback gained more than 1 percent versus the pound and the Australian dollar in New York.

The U.S. currency was little changed at $1.1019 per euro Wednesday.

While data in the U.S. proved a surprise for traders, an unexpected drop in German investor confidence drove the euro lower before the European Central Bank’s July 21 meeting. An index of investor expectations compiled by the ZEW Center for European Economic Research in Mannheim, Germany fell to its lowest level since November 2012 in July. The euro fell 0.6 percent against the dollar.

Although traders see just an 8 percent chance the Fed will raise rates at its July 26-27 meeting, there’s a 43 percent probability the central bank will hike by year-end, futures data show. That’s up from 4 percent and 31 percent respectively one week ago. The central bank raised its target for the federal funds rate in December to 0.25 percent to 0.50 percent, the first increase since 2006.

The IMF cut its global outlook for the fourth time to 3.1 percent from 3.2 percent, equal to growth in 2015. The Washington-based fund said the U.K. will slip into recession if talks between British and EU officials to reach new trade agreements break down. The U.S. jobs numbers indicate growth, IMF’s chief economist Maurice Obstfeld said at a news briefing.

"There’s an element that pertains to the broader dollar sentiment in terms of the U.S. numbers coming in stronger than expected," said Vassili Serebriakov, foreign-exchange strategist at Credit Agricole CIB in New York. “The U.S. numbers are quite solid, so it’s clear the Fed will become increasingly important.”

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