(Bloomberg) -- Don’t panic. The dollar’s smallest gain since June doesn’t mean the rally has run its course.
The greenback barely rose in February, after climbing 17 percent since the start of July as the Federal Reserve moves closer to reducing stimulus, while central banks around the world cut interest rates. That contrast will be on display with a report March 6 forecast to show the U.S. jobless rate matching the lowest level since 2008 and a European Central Bank meeting March 5 to discuss its unprecedented bond-buying program.
“We’re likely to continue to see investors move money to the U.S. as rates here clearly look far more attractive than rates in the rest of the world,” said Kate Warne, a St. Louis-based investment strategist at Edward Jones & Co., which manages $870 billion. “That spread, plus the expectation that the Fed starts to raise rates later in the year will keep the dollar well supported and moving higher.”
The Bloomberg Dollar Spot Index, a gauge of
the currency versus 10 major peers, added 0.4 percent in February in New York. It has gained for eight months.
The greenback strengthened 0.8 percent to $1.1196 per euro and 1.8 percent to 119.63 yen. Japan’s currency lost 1 percent to 133.94 per euro. The dollar is forecast to appreciate to $1.10 per euro by Dec. 31, after strengthening 14 percent in 2014.

Futures Positions

Against a backdrop of global easing from Switzerland to Canada and Australia, the dollar has rallied versus all of its 16 major peers during the past 12 months. Yields on 10-year Treasuries exceeding those on similar-maturity securities issued by 19 other developed nations are burnishing the dollar’s appeal, according to data compiled by Bloomberg.
Its advance slowed this week amid reports of sluggish inflation and a downward revision to fourth-quarter economic growth.
Hedge funds and other large speculators reduced wagers on the U.S. currency’s strength versus eight of its major peers to 404,276 as of Feb. 24, the least since December, according to Commodity Futures Trading Commission data compiled by Bloomberg.
Futures contracts on Friday however showed a 57 percent likelihood that the Fed will raise rates by its October meeting and a 17 percent chance that this will happen in June.

Fed Watch

“June is absolutely still on the table,” said Jennifer Vail, head of fixed-income research in Minneapolis at U.S. Bank Wealth Management, which manages $122 billion in assets. “The dollar’s strength is likely to be more modest than the substantially sharp appreciation we’ve witnessed over the past six to eight months.”
Fed Chair Janet Yellen’s testimony to Congress Feb. 24-25 balanced references to improvements in the labor market with concerns that “too many Americans remain unemployed or underemployed.”
U.S. companies added 235,000 jobs in February, according to the median estimate of 65 analysts surveyed by Bloomberg News. The jobless rate dropped to 5.6 percent, another survey showed.
“The market was expecting something else from Yellen, but she basically played her greatest hits: she was saying nothing new,” Alfonso Esparza, senior currency analyst in Toronto at Oanda Corp., said by phone. “That takes us into next week, where nonfarm payrolls are going to be massive, and giving some direction in terms of the rally.”