Dollar’s Rally Fades

Dollar bulls are bewildered amid a sea of setbacks as investors ponder what's left of the rally that had pundits talking of dollar hegemony just months ago.

The U.S. currency slid Thursday toward the lowest closing level in almost four months against major peers after stagnant retail sales became the latest data to undermine prospects for Federal Reserve interest-rate increases. The greenback had climbed nine straight months through March with the first hike in almost a decade looming. The U.S. currency fell to its lowest level in almost three months against the euro.

“It is really all about dollar weakness across the board today as markets are still digesting the U.S. retail-sales data,” said Keng Goh, a foreign-exchange strategist at Royal Bank of Canada in London. While RBC expects the Fed to increase rates in September, “no doubt some of the weakness in the data will probably diminish that conviction a little bit.”

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major trading partners, slipped 0.4 percent to 1,150.76 as of 6:44 a.m. in New York, after it dropped 0.7 percent on Wednesday in the biggest one-day decline since March 23. The index is down 4.1 percent over the past month, stalling after a 20 percent rally from June 30 to March 31.

The greenback fell 0.7 percent to $1.1429 per euro, after dropping 1.2 percent Wednesday. That brought its decline versus the common currency to about 6.8 percent against the euro in the past month. It was little changed at 119.17 yen following a 0.6 percent slide in New York.

A measure of the euro's outlook against the dollar over the next month rose to its highest level since 2014. The 25-delta risk reversals climbed to -0.6450 percent, the least bearish since Nov. 20.

The dollar is “dropping like a stone for very good reason,” Jonathan Lewis, a principal at New York-based Samson Capital Advisors LLC, said in a note. “The U.S. economy is weakening and with the Fed on hold an important investment thesis for a bull move in the dollar is gone,” said Lewis, whose company oversees $7.4 billion in assets.

A Bloomberg survey conducted April 22-24 showed 73 percent of 59 economists said the Fed's first rate increase since June 2006 will come in September, up from 37 percent in a March survey when a majority predicted an increase in June or July.

Retail sales were little changed in April, Commerce Department figures showed Wednesday. The median forecast of 88 economists surveyed by Bloomberg called for a 0.2 percent gain. U.S. economic indicators have missed expectations since January, according to Citigroup data.

“There's no way to put lipstick on a pig really, it was disappointing,” said Richard Franulovich, the chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York. “Whatever bounce back we see I think is going to underwhelm, ergo I think more dollar weakness is the order of the day.”

Euro Strength

Compounding the dollar's decline, euro-area gross domestic product data released on Wednesday showed an increase of 0.4 percent compared with the fourth quarter of 2014. This was the strongest growth since the second quarter of 2013.

Telefonica SA, Europe's second-largest phone company, on Thursday reported first-quarter revenue that beat analysts' estimates, signaling business in Spain is continuing to improve.

“The combination of that softer dollar, some firming up of inflation and fewer negative headlines around Greece are certainly propping up the euro for now,” said Jennifer Vail, head of fixed-income research in Portland, Oregon, at U.S. Bank Wealth Management, which manages $126 billion.

Vail said she expects the euro to resume its drop to $1.04 against the dollar by the end of this year as the Fed contemplates raising rates in contrast with the European Central Bank, which is carrying out unprecedented stimulus measures. That prediction matches the median estimate of analysts surveyed by Bloomberg.

“The dollar is going to retain its shining-star status,” Vail said.

Bloomberg News

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