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Dollar Strengthens on Fed Rate Outlook; Pound Falls on Inflation

Aug. 19 (Bloomberg) -- The dollar rose against major peers as signs of economic recovery supported the case for the Federal Reserve to raise interest rates. The pound dropped to a four- month low versus the dollar after U.K. inflation slowed.

The Bloomberg Dollar Spot Index rose from a two-week low as a report showed housing starts rose more than forecast last month. New Zealand’s currency fell for a third day after a producer-price index declined. Australia’s dollar climbed to the highest this year versus the kiwi after the nation’s central bank reiterated a period of rates stability is prudent.

“Any positive surprises to U.S. data will be enough to cause U.S. yields to rebound,” said Michael Sneyd, a foreign- exchange strategist at BNP Paribas SA in London. “This would provide some considerable support for the dollar.” Sneyd said he favors buying the dollar against the yen, and selling the euro for dollars.

The greenback strengthened 0.2 percent to $1.3344 per euro at 8:33 a.m. New York time. It appreciated 0.3 percent yesterday, the most since Aug. 5. The dollar added 0.2 peprcnet to 102.74 yen. The 18-nation euro was at 136.99 yen from 137.07 yesterday.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, rose 0.2 percent to 1,022.17.

Treasury 10-year yields fell one basis point, or 0.01 percentage point, to 2.38 percent, heading toward a 14-month low of 2.30 percent reached on Aug. 15.

U.S. Economy

U.S. home construction starts climbed 15.7 percent 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.”

Pound, Kiwi

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 percent in July from 1.9 percent the previous month. Economists had forecast 1.8 percent.

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

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

Kiwi Declines

The kiwi slid 0.4 percent to 84.49 U.S. cents, the biggest decline since Aug. 5. The Aussie added 0.2 percent to 93.39 U.S. cents, after strengthening to 93.43, the most since Aug. 7.

Australia’s currency rose against most of its major peers. Central-bank minutes of its policy meeting this month reiterated that interest rates are set to remain on hold.

Members “noted the significant uncertainties around the growth forecast and the importance of considering the risks to the forecast as well as the central projection,” the Reserve Bank of Australia said in minutes today of its Aug. 5 meeting, where it kept the cash rate unchanged at a record-low 2.5 percent.

The Swiss National Bank is seen maintaining its cap on the franc 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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