Dollar Advances as Fischer Tips Fed Balance Toward Tightening

  • Probability of U.S. rate increase in 2016 rises above 50%
  • Fed vice chairman sees economy close to central bank goals

Bank of Japan Shocks for Japanese Stocks

The dollar extended a rebound from a seven-week low as traders bolstered bets on a U.S. interest-rate increase this year after Federal Reserve Vice Chairman Stanley Fischer said the economy is close to meeting the central bank’s goals.

A gauge of greenback strength rose for a second day as the U.S. currency advanced against most major currencies tracked by Bloomberg. Fischer’s comments from Sunday echoed signals from Fed officials last week indicating the central bank is poised to raise rates by year-end. That pushed the probability of a hike by December to 53 percent, futures show.

“Fischer appears to have nudged up market expectations of a further rate hike this year,” said Laura Rosner, a New-York based senior U.S. economist at BNP Paribas SA, who expects the Fed to increase rates in September and the dollar to gain against both the euro and the yen in the third quarter.

The Bloomberg Dollar Spot Index rose 0.2 percent as of 5 p.m. in New York. The U.S currency strengthened 0.1 percent to 100.33 yen, and fluctuated at $1.1319 per euro.

“We are close to our targets,” Fischer said in a speech in Colorado on Sunday. “Looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes,” he added, without giving explicit views on his rate outlook.

The comments come after Fed Bank of New York President William Dudley said last week that strong job gains reinforced his view that wages are starting to move higher. San Francisco Fed President John Williams said the central bank’s next meeting in September is “in play” for a rate increase, while St. Louis Fed President James Bullard said the Fed is “very close” to its goals.

Traders are pricing in a 26 percent probability that the Fed increases rates next month and a 53 percent chance that it tightens policy by its December meeting, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase. That compares to 18 percent and 45 percent, respectively, a week ago. Fed Chair Janet Yellen speaks Aug. 26 at a symposium in Jackson Hole, Wyoming.

“Fischer’s upbeat comments have added to the broader narrative of an increasingly confident FOMC,” Shaun Osborne and Eric Theoret, strategists at Bank of Nova Scotia in Toronto, wrote in a note to clients. “Market participants are pricing a remarkably low Fed path relative to an FOMC that unanimously favors at least one hike by the end of the year.”

— With assistance by Chikako Mogi, Daisuke Sakai, Eddie Van Der Walt, Netty Idayu Ismail, and Hiroko Komiya

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