The dollar strengthened on speculation the Federal Reserve is still on course to raise interest rates this year after minutes of its January meeting showed policy makers argued for keeping borrowing costs lower for longer.
The U.S. currency rose the most in more than a week against a basket of peers as jobless claims decreased more than forecast last week. It advanced against the euro after Germany rejected Greece’s proposal for an extension to its rescue loans.
“Despite the initial reaction to the Fed’s minutes, some investors stepped back and thought the U.S. economic data were actually solid,” said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd. in London. “A rate increase by the Fed may not be immediate, but 2015 is still a possibility. Any dollar weakness may be temporary.”
The Bloomberg Dollar Spot Index added 0.4% to 1,166.55 at 8:41 a.m. New York time, its biggest gain since Feb. 11. The U.S. currency appreciated 0.1% to $1.1381 per euro. It was 0.3% stronger at 119.09 yen, having dropped to 118.44 yen earlier.
While investors pushed back bets on when the Fed would raise interest rates, they’re still showing confidence an increase is likely by year-end. Federal fund futures traded on the CME Group Inc. exchange give a 19% chance the central bank will lift rates at their policy meeting in June, according to data compiled by Bloomberg. That is down from 25% on Feb. 17. They show 77% odds of an increase by December.
“Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time,” according to the record of the Jan. 27-28 Federal Open Market Committee meeting released Wednesday in Washington.
The main lending rate has been in a range of zero to 0.25% since 2008.
The greenback gained as jobless claims fell by 21,000 to 283,000 in the week ended Feb. 14, from 304,000 in the prior period, a Labor Department report showed Thursday in Washington. The median forecast of 50 economists surveyed by Bloomberg called for 290,000.
This comes after reports over the past month on durable goods orders, gross domestic product, factory orders and retail sales all failed to meet economists’ expectations. The outlier in last month’s data was the monthly employment data that showed payrolls rose more than forecast economists in January, capping the strongest three months of jobs growth in 17 years. The report was on Feb. 6, after the Fed’s January policy meeting.
“The dollar had a steep selloff after the Fed minutes on Wednesday, but it seems the market is coming back in with a bit more clarity today,” said Eimear Daly, a currency strategist at Standard Chartered Plc in London. “The minutes were out of date considering the Fed hadn’t seen January jobs data and the spike in earnings. A setback in dollar is seen by some as an opportunity to buy.”
The euro declined versus the dollar after German Finance Ministry Spokesman Martin Jaeger said Greece’s letter requesting a six-month extension of rescue loans doesn’t meet the euro region’s conditions for continuing aid.
“The euro will come under pressure as the EU continues to show little appetite for compromise at this stage,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “It looks as if the negotiations will still face challenges.”
The euro may fall toward $1.1320 and a move below that level will open the way for declines toward $1.1265 and $1.1100, he said.