Dollar bulls who have watched America's currency slide over muchof the past two months are taking comfort in readings from theFederal Reserve Bank of Atlanta's economic growth model.

The forecasting tool known as GDPNow is starting to show arecovery from the slowdown that derailed the greenback's rally atthe end of the first quarter. That's renewing optimism that the Fedwill have enough confidence to raise interest rates before the endof the year, which has underpinned the U.S. currency's 18 percentrally in the past 12 months.

Even though variations have been around since 2011, the indexgained widespread notoriety in April by basically predicting thefirst-quarter slowdown, making it one of the most accurateprojections for gross domestic product when compared withanalyst forecasts. The gauge is becoming more closely watched, withFed policy makers now saying they're making rate decisions on ameeting-by-meeting basis, based purely on the economic data infront of them.

“For the dollar, this is massively important,” said Viraj Patel,a currency strategist at ING Groep NV in London, who follows theindex. “Currency traders are reacting more now to the data.”

The Atlanta Fed output model was updated Tuesday to showsecond-quarter growth tracking a 0.8 percent pace, up from 0.7percent as of May 19. The higher revision followed CommerceDepartment data showing capital equipment orders rose in April fora second straight month.

The dollar followed suit, climbing to an almost eight-year highagainst the yen. The Bloomberg Dollar Spot Index, which tracks thegreenback versus 10 major peers, advanced 0.9 percent to 1,191.84,touching its highest this month. The measure reached a new highWednesday.

Investors and strategists are analyzing economic results “liketea leaves—including myself,” said Sebastien Galy, a New-York basedcurrency strategist at Societe Generale SA, who also utilizes themodel. “It is nice to have a live tool. In essence it is a taste ofthe future.”

The Atlanta Fed's GDPNow tracker aggregates statisticalmodel forecasts of 13 components that make up growth. It'srefreshed five or six times a month, with at least one updatefollowing six data releases including retail sales, durable goods,and construction.

Statistical Analysis

The GDPNow index started falling in mid-February, a month beforethe dollar's rally came to a halt. The fall in growth projectionsvia the model bottomed at zero percent on April 1 before reboundinginto positive territory.

The model predicted 0.1 percent growth as of its last updatebefore the Commerce Department on April 29 reported first-quartergrowth of 0.2 percent. The consensus of 86 forecasters surveyed byBloomberg predicted a 1 percent expansion in the first three monthsof the year.

“The GDPNow model is getting a lot of attention right nowbecause it was accurate this last quarter,” said Jennifer Vail,head of fixed-income research in Portland, Oregon, at U.S. BankWealth Management, which manages $126 billion, who says the pace ofoutput for a nation historically is key to its currency's value.Yet she isn't expecting the model will prove spot-on again.

“It is certainly something that we have followed for over a yearnow,” Vail said. “It's certainly possible it is correct for thesecond quarter, but I see that as unlikely.”

While policy makers may have a clue about what it will say, theCommerce Department doesn't report the initial GDP for secondquarter until July 30, the day after the July Federal Open MarketCommittee meeting.

The economy expanded at a 2.65 percent annual pace in thecurrent quarter, according to the median estimate in a Bloombergsurvey.

“Everyone on the street knows how to translate monthlycomponents into GDP. The difference with what the Atlanta Fed doesis they have a specific equation based on statistical techniquesthat takes them from the April number and gives them the May, Junenumber as well,” Steven Englander, global head of Group of 10currency strategy at Citigroup Inc. in New York, said by phone.“There are equations, but very few that Wall Street has do it asformally as they do, and use as sophisticated techniques.”

Patel at ING, which forecasts the dollar will strengthen toparity versus the euro by the third quarter, said the bullish viewcomes as activity will rebound further and the Fed model willforeshadow that in the weeks ahead.

“The data will improve,” he said. “All the fundamentals remainpositive for the dollar, and the Fed will at some point hikeinterest rates.”

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