US trade data signals dollar recovery

The dollar’s weak start to 2016 is showing signs of a turnaround as doubts about the economic outlook fade, according to US Bank Wealth Management and Pioneer Investments.

Traders who almost completely rule out a Federal Reserve interest rate increase this year are confronted with data showing the US economy is growing at a faster pace than its major peers.

A forecasting tool created by the Fed Bank of Atlanta indicates US growth in the first quarter of 2.6 per cent at an annual rate, exceeding 1.6 per cent average for Group of Eight countries, according to Bloomberg surveys.

“Moving to the extreme of zero hikes this year is not based on rational thought,” said Jennifer Vail, head of fixed income research in Portland, Oregon, at US Bank Wealth Management, which oversees $125 billion. “The Fed’s dual mandate of employment and inflation are both crying for normalisation. It’s going to support our case for modest dollar appreciation throughout the year” against the euro and currencies of commodity exporters.

The dollar’s selloff paused last week, as oil prices rose and eased concern that a global demand slump may spill into the US.

The Bloomberg Dollar Spot index, which tracks the greenback versus 10 peers, was little changed last week and is down 1.1 per cent this year. The index rose 20 per cent during the past two years.

The greenback is down 2.4 per cent versus the euro and 6.3 per cent against the yen in 2016 as investors scaled back wagers of dollar strength based on Fed rate increase while other major central banks increase monetary stimulus.

Futures traders price in a 44 per cent probability that the Fed raises rates this year, 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. The likelihood is up from 30 per cent a week earlier.