Dollar Advances as Retail Sales Strengthen Case for Rate Hike

  • Rosengren says Federal Reserve may have to raise rates faster
  • Traders wager there’s a 69% probability of move by year-end

The dollar advanced to near a seven-month high after a report showing retail sales rose by the most in three months bolstered the Federal Reserve’s case to raise interest rates by year-end.

The greenback gained against most Group-of-10 peers even after Fed Chair Janet Yellen said there are “plausible ways” that running the economy hot for a while could fix some of the damage caused to growth trends by the Great Recession. Boston Fed Bank President Eric Rosengren said earlier the central bank may have to raise rates faster than the market forecasts. Futures show the likelihood of a hike by year-end climbed to 69 percent, from 60 percent a month ago.

"It’s a gentle dollar-bull trend here," said Chris Turner, London-based head of currency strategy at ING Groep NV. There may be "another 1 or 2 percent of dollar strength if the Fed does deliver a hike."

The U.S. currency has rallied for three straight weeks versus the yen in the longest stretch of gains since May. The dollar pared its losses this year to about 2.2 percent, as the jobs market remains solid and traders grow more confident policy makers will embark on a slow path to normalizing, or raising their rate target toward historical averages.

Bloomberg’s Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.4 percent as of 5 p.m. New York time. It touched a seven-month high on Thursday. The greenback added 0.5 percent to 104.18 yen.

“Increased business sales would almost certainly raise the productive capacity of the economy by encouraging additional capital spending,” Yellen said in the text of a speech to a Boston Fed conference .

“Her comments seem to be consistent with the gradual policy regarding higher rates -- that means any potential for a stronger dollar will be limited,” said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California.

Minutes released this week showed policy makers in September were moving toward additional tightening amid stable employment growth and rising inflation. Commerce Department figures released Friday showed retail sales climbed 0.6 percent last month, following a revised 0.2 percent decline in August.

The dollar will move "sideways to firmer" in the fourth quarter, said Win Thin, global head of emerging markets at Brown Brothers Harriman & Co. in New York. "The run-up to the Fed rate hike should keep it firm."

In an interview with CNBC, Rosengren said the market’s pricing on a December rate increase is about right, and he’s concerned about overshooting on unemployment and having to tighten faster. Rosengren was among three voters on the Federal Open Market Committee to dissent against the panel’s Sept. 21 decision to leave the benchmark interest rate in a range of 0.25 percent to 0.5 percent.

— With assistance by Lananh Nguyen

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