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By Bloomberg

The dollar resumed its best rally in 6 1/2 years as investors speculate on the timing of the Federal Reserve’s first interest rate increase since 2006.

A gauge of the dollar rebounded Friday after its first loss in seven days, remaining on course for a fourth weekly gain before Fed policy makers meet next week. Traders bets indicate 20 percent odds of a rate boost by the central bank’s June meeting, according to futures data compiled by Bloomberg.

“The move we saw last night is very consistent with a small correction in the broader U.S. dollar bull story,” said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand Ltd. in Auckland. “We expect next week to be some moderation in the Fed’s patience language,” with interest rates likely to rise by September, he said.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.2 percent to 1,215.16 at 6:30 a.m. in London from Thursday, when it declined 0.4 percent. Previously, it had gained for six straight days, reaching the highest closing level in data going back to 2004.

The gauge is up 7.4 percent this year, headed for its best quarter since the period ended September 2008.

The dollar gained 0.5 percent to $1.0577 per euro from Thursday, when it weakened 0.8 percent. It touched $1.0495 earlier that day, the strongest level since January 2003. The U.S. currency added 0.2 percent to 121.49 yen, approaching the 7 1/2-year high of 122.03 set on March 10.

For the week, the greenback has gained 2.5 percent versus the euro, and has advanced 0.6 percent against the yen.

Retail Sales

Declines in the greenback accelerated Thursday after data showed U.S. retail sales unexpectedly dropped in February for a third consecutive month.

The 0.6 percent decline followed a 0.8 percent decrease in January, Commerce Department figures showed. The median forecast of 86 economists surveyed by Bloomberg News projected a 0.3 percent gain.

“The retail sales report was bad across the board, taking the dollar down another notch,” said Keisuke Hino, a foreign- exchange trader at Mizuho Bank Ltd. in New York. “The dollar has come a long way, so it’s unsurprising you would have a bit of a correction. The overall trend for dollar strength hasn’t changed.”

The Fed’s meeting next week comes against a backdrop of reports showing strength in the U.S. labor market, fueling speculation policy makers will raise its benchmark lending rate from a record low near zero, where it’s been since 2008.

‘Disinflationary Pressures’

“Too strong a dollar is not good for the U.S. economy,” Kerry Craig, a global strategist at JPMorgan Asset Management in London, wrote in an e-mail. “It creates disinflationary pressures and a drag on economic growth from the export sector, which could actually lead the Fed to delay a rate hike. Is the rest of the U.S. economy strong enough to offset that?”

With the European Central Bank embarking on its 60 billion euro-a-month ($63 billion) bond-buying program, investors are debating whether the Fed will maintain its pledge to be patient on tightening policy.

The euro is poised for its biggest quarterly loss on record against the dollar after ECB President Mario Draghi reiterated Wednesday the central bank’s commitment to spurring inflation. Its 12 percent decline this year, with almost three weeks before the quarter ends, compares with an 11 percent slide in the third quarter of 2008. The ECB’s 1.1 trillion-euro quantitative-easing program enters its fifth day Friday.

“The market has leapfrogged even our most bearish forecast,” Sue Trinh, senior currency strategist at Royal Bank of Canada in Hong Kong, said in a Bloomberg Television interview. “At the moment our formal base for the euro is $1.05. We can’t rule out a move to parity.”