By James Ramage
The dollar advanced against the euro on Friday, capping its
biggest weekly gain in more than three years, after the U.S.
reported inflation growing faster than expected and the Federal
Reserve reiterated it was on track to raise short-term interest
rates this year.
Upbeat inflation figures for April come on the heels of
indicators this week that pointed to a continued recovery in the
labor and housing markets. That heartened dollar bulls who've
recently been rattled by a first-quarter slump in the U.S. economy.
While the headline consumer-price index was in line with
expectations, so-called core inflation, which strips out the
effects of volatile food and energy prices, rose by 0.3%, the
biggest gain since January 2013.
Federal Reserve officials watch inflation numbers closely in
trying to gauge the health of the U.S. economy and determine when
they would raise interest rates for the first time since 2006.
"The core inflation number was encouraging. It was good for the
dollar," said Jim Caron, portfolio manager on the global
fixed-income team at Morgan Stanley Investment Management, which
oversees $406 billion. "This feels like we're taking a small step
forward in what needs to be many, many steps forward."
Later in the trading session, Fed Chairwoman Janet Yellen said,
in remarks to the Greater Providence Chamber of Commerce in
Providence, R.I., that it would be "appropriate at some point this
year to take the initial step to raise the federal-funds rate
target and begin the process of normalizing monetary policy."
Ms. Yellen's comments "support the dollar's large gains today,"
said Robert Lynch, head of developed-market currencies strategy for
the Americas at HSBC Bank USA. "Hearing the Fed chair reiterate
that rates are still expected to go up this year may resonate in
the market."
The dollar has staged a sharp seven-month rally that gained
traction last summer on expectations that the Fed would raise rates
while other major central banks would continue to pursue loose
monetary policies. Relatively high rates make a currency more
attractive to investors.
But that rally began to sputter in mid-March amid a flurry of
soft economic data, including first-quarter growth that clocked in
at an anemic 0.2% rate. At the same time, the eurozone began to
show signs of stronger growth.
That prolonged halt spooked investors, convincing many in the
market that the greenback's ascent would be more measured when it
resumed.
The Wall Street Journal Dollar Index, which tracks the
greenback's value against a basket of 16 currencies, rose 0.7% on
Friday and 2.6% this week.
The dollar on Friday gained 1% against the euro, with one euro
buying $1.1006; it was at $1.1113 in late New York trading on
Thursday. For the week, the buck notched a 4% gain against the
common currency, the biggest one-week rise since September
2011.
To be sure, many investors remain reluctant in putting fresh
bets on the dollar. Net bets that the dollar would appreciate
against the euro declined 5.9% in the week ended May 19, according
to the U.S. Commodity Futures Trading Commission.
The dollar rose 0.4% to JPY121.55 against the yen and was on
track to hit its highest New York close in more than seven
years.
Fed-funds futures, which traders and investors use to wager on
Fed policies, showed that investors see a 61% chance for a rate
increase in December, compared with 55% before the inflation
numbers were released, according to CME Group. Investors also see a
46% chance of a rate increase in October, compared with a 38%
probability before the data. Market participants see a 27%
probability of higher rates in September.
Friday's inflation data "makes a September rate hike more
probable," said Vassili Serebriakov, currency strategist at BNP
Paribas. "It strikes against the complacency that the Fed won't be
able to move at all this year."