Dollar set to grow stronger against Chinese currency

(Bloomberg) — The diverging fortunes of the world's two biggest economies mean one thing for currency markets: a stronger dollar.

A gauge of the greenback extended its first weekly advance in a month before data Tuesday forecast to show U.S. retail sales increased by the most in a year, bolstering the case for the Federal Reserve to raise interest rates in 2015. Economists predict China will report its slowest growth since the global recession, fuelling demand for haven assets.

"The Fed said rate hikes depend on the data, so market participants will be watching for evidence of whether or not a hike is likely this year," Toshiya Yamauchi, a senior analyst in Tokyo at Ueda Harlow Ltd., a margin-trading-services provider, wrote in a note to clients. "Concern about China's economy could spur buying of the dollar and yen."

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.7 percent to 1,212.06 at 10:39 a.m. Sunday after gaining 1.8 percent last week. That was the first weekly advance since it closed at 1,222.12 on March 13, the highest in data going back to 2004.

The greenback appreciated 0.7 percent to $1.0534 per euro after surging 3.4 percent last week, the most since September 2011. The U.S. currency climbed 0.5 percent to 120.80 yen.

Net bullish bets for the dollar to strengthen against the euro by hedge funds and money managers remained close to a record, according to Commodity Futures Trading Commission data. Futures positions betting on a stronger greenback versus the shared currency were at 215,258 contracts as of April 8, down from the all-time high of 226,560 reached the week before.

Sales Climb

U.S. retail sales rose 1 percent last month, according to a Bloomberg survey of economists. Retailers were hurt in February as bitter cold swept over parts of the U.S., discouraging consumer purchases.

China's economy expanded 7 percent in the first three months of 2015 compared with a year earlier, analysts in another Bloomberg survey estimated before Wednesday's report. That would be the slowest pace since the same period in 2009.

The dollar will continue to strengthen, but gains over the next couple of quarters will be muted compared to the most recent quarters, according to Morgan Stanley and JPMorgan Chase & Co.

"The anticipated reaccleration of the U.S. economy should keep USD strong," analysts including Hans Redeker, Morgan Stanley's head of global foreign-exchange strategy, wrote in a note dated April 12. Gains will be slower as "valuations are important to consider here since USD has become more expensive, increasing headwinds for the U.S. economy. U.S. export dynamics have weakened markedly."

Dollar Forecasts

The dollar will appreciate to 98 cents per euro by year- end, compared to an earlier forecast of $1.05, the strategists wrote. The U.S. currency will gain to 123 yen over the same period. This is a smaller advance than the 127 yen previously estimated as Morgan Stanley does not expect the Bank of Japan to increase its bond-buying program.

"Our USD targets would be more aggressive were it not for the dollar's valuation problem and the Fed's gradual push-back on a strong currency," JPMorgan strategists including Kevin Hebner and John Normand wrote in a note dated April 10.