The dollar’s weak start to 2016 is showing signs of a turnaround as doubts about the economic outlook fade, according to U.S. Bank Wealth Management and Pioneer Investments.

Traders who almost completely rule out a Federal Reserve interest-rate increase this year are confronted with data showing the U.S. economy is growing at a faster pace than its major peers. A forecasting tool created by the Fed Bank of Atlanta indicates U.S. growth in the first quarter of 2.6 percent at an annual rate, exceeding 1.6 percent average for Group of Eight countries, according to Bloomberg surveys.

“Moving to the extreme of zero hikes this year is not based on rational thought,” said Jennifer Vail, head of fixed-income research in Portland, Oregon at U.S. Bank Wealth Management, which oversees $125 billion. “The Fed’s dual mandate of employment and inflation are both crying for normalization. It’s going to support our case for modest dollar appreciation throughout the year” against the euro and currencies of commodity exporters.

The greenback is down 2.4 percent versus the euro and 6.3 percent against the yen in 2016 as investors scaled back wagers of dollar strength based on Fed rate increase while other major central banks increase monetary stimulus.

Futures traders price in a 44 percent probability that the Fed raises rates this year, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase. The likelihood is up from 30 percent a week earlier.

Monetary Policy

“Divergence in monetary policies still matters,” said Paresh Upadhyaya, director of currency strategy in Boston at Pioneer Investments, which oversees more than $240 billion. He said he is “more heartened” to buy the dollar against the euro and the yen.

A report Friday showed consumer prices excluding food and fuel rose by the most in more than four years in January, adding to evidence that inflation may be moving toward the Fed’s 2 percent target.

“The risk right now is so skewed to one extreme that the reward favors the pendulum swinging the other way,” Upadhyaya said.

Bloomberg