U.S. economy on its way to recovery

The dollar rose against major peers as a report showed housing starts reached the highest level in eight months, adding to evidence the U.S. economy is gaining traction.

The Bloomberg Dollar Spot Index strengthened from a two-week low on speculation faster economic growth will lead the Federal Reserve to raise interest rates next year. The pound (CME:B6U14) dropped to a four-month low versus the dollar after U.K. inflation slowed. New Zealand’s currency (CME:N6U14) fell for a third day after a producer-price index declined.

“This indicates the housing market has rebounded, which should provide some support for U.S. economic growth,” said Michael Woolfolk, a global-markets strategist at Bank of New York Mellon in New York. “It’s a real boost of confidence to growth expectation, though the dollar won’t really get significant upside performance until the Fed” sends out strong signals of tightening. Woolfolk forecast the dollar will rise to $1.22 per euro in 12 months.

The greenback strengthened 0.3% to $1.3331 per euro at 8:48 a.m. New York time. The dollar (NYBOT:DXU14) added 0.1% to 102.68 yen. The 18-nation euro fell 0.2% to 136.87 yen.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, rose 0.2% to 1,022.14.
 

Housing Starts
 

U.S. home construction starts climbed 15.7% to a 1.09 million annualized rate following June’s 945,000 pace, which was stronger than previously reported, the Commerce Department reported. The level exceeded the highest estimate in a Bloomberg survey of economists, whose median projection called for 965,000 starts.

The Fed reduced monthly bond purchases by $10 billion for a sixth consecutive meeting last month to $25 billion. Chair Janet Yellen is scheduled to deliver a speech at an annual symposium in Jackson Hole, Wyoming, where the focus of the three-day meeting of central bankers and economists beginning Aug. 21 will be on the labor market. European Central Bank President Mario Draghi is also among the speakers.

“It’s all but certain the Fed will move before the ECB and the Bank of Japan, where the expectation is for more policy easing,” said Yujiro Goto, a currency strategist in London at Nomura Holdings Inc., Japan’s largest brokerage. “The policy divergence is a positive for the dollar, and I don’t expect the outlook to change this week.”

The pound weakened against all of its 16 major peers after a report showed the annualized rate of price growth in the U.K. fell to 1.6% in July from 1.9% the previous month. Economists had forecast 1.8%.

Sterling declined 0.6% to $1.6630 after falling to the lowest since April 8.
 

Kiwi Down
 

The kiwi dropped the most in two weeks after the statistics bureau said today New Zealand producer output prices fell 0.5% in the second quarter from the previous three months, when they rose 0.9%. Input prices declined 1% in the period, unwinding a 1% climb.

The government cut its forecast for economic growth and projected smaller budget surpluses.

“Because the PPI number had a negative in front of it, it perhaps caught the market’s attention, and helped add some downward pressure to the New Zealand dollar,” said Kymberly Martin, a market strategist in Wellington at Bank of New Zealand Ltd.

The kiwi slid 0.4% to 84.49 U.S. cents, the biggest decline since Aug. 5.

The Swiss National Bank is seen maintaining its cap on the franc (CME:S6U13) of 1.20 per euro for at least another two years, according to more than three quarters of economists surveyed by Bloomberg. The central bank will keep the ceiling in place as the economic revival in the neighboring euro area struggles to gain traction.

The franc was little changed at 1.21053 per euro. It fell below 1.21 on Aug. 15 for the first time since January 2013.

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