Dollar rises from five-month low as traders reprice Fed outlook

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The dollar rose for the first time in four days as investors recalculated the likelihood of an interest-rate increase from the Federal Reserve, having wiped out expectations for any tightening earlier this year.

The U.S. currency rebounded from the weakest level since October as evidence mounts that the world’s biggest economy is weathering a global economic slowdown driven by China. Citigroup Inc.’s Economic Surprise Index, which measures data performance relative to market expectations, rose to a four-month high. The improving economic outlook led futures traders to price in a 52 percent chance of a rate increase by June, up from 6 percent just a month ago, according to data compiled by Bloomberg.

"The market has been pricing the Fed back in a little bit," said Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York. "A lot hinges on what you think the underlying economy is. For us, it’s not strong enough for them to hike this year."

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, advanced 0.4 percent to 1,206.56 as of 5 p.m. New York time. Last week, it closed at the lowest level since Oct. 21.

The gauge has stumbled 2.1 percent this year, paring a two-year rally that was fueled by speculation that the Fed would boost borrowing costs while its biggest peers in Europe and Japan carried out unprecedented stimulus.

Traders expect almost zero probability the Fed will raise interest rates at a meeting this week, following an increase in December that was the first in almost a decade. Officials will update the so-called dot plot, or outlook for the expected path of the benchmark rate. The median rate-hike outlook by officials in December was for four increases in 2016.

"Investors have to ask themselves whether the Fed likes these odds, and will validate them, or try and shift expectations in one direction or another," Steven Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy, wrote in a report. "A median of two hikes would be viewed as very dovish and probably be viewed a pointing to no more than two hikes and maybe one or none."