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Dollar bears say Fed hawks can’t boost rate odds

Tokyo - Federal Reserve officials’ rhetoric will need to be more hawkish than recent pronouncements to raise the odds of higher US interest rates this year much above a coin toss, according to Westpac Banking and BNP Paribas.

A gauge of the dollar was little changed after slipping for a third day Wednesday, even after Fed chair Janet Yellen told lawmakers that a majority of Federal Open Market Committee members expect a rate increase this year.

The odds of a move by year-end rose to 54% from 50% prior to Yellen’s remarks, but are down from 61% a week earlier. Both Westpac and Paribas predict the dollar will drop back below 100 yen.

While Fed officials including Yellen have signaled in recent weeks that the case for tighter policy has strengthened, the FOMC decided against raising the benchmark rate on September 21 for a sixth straight meeting, following liftoff in December.

Economic data has taken a turn for the worse this month, with a Bloomberg gauge showing the biggest underperformance relative to economist estimates since June. Yellen speaks again Thursday, as do Governor Jerome Powell and the heads of the Fed’s Atlanta, Minneapolis and Philadelphia branches.

“Markets aren’t likely to take seriously Fed protestations that the November meeting is ‘live,’ and pricing for December should struggle to rise much beyond 55%,” said Sean Callow, a Sydney-based senior currency strategist at Westpac. “We retain a modest negative bias on the dollar.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was little changed at 08:04, after declining 0.4% over the previous three days.

The dollar slipped 0.2% to $1.1234 per euro. It gained 0.7% to ¥101.36, advancing for a third day. The greenback touched a one-month low of ¥100.09 on Tuesday, and had dropped to as weak as 99.02 - a level unseen since November 2013 - on June 24 in the immediate aftermath of the UK vote to leave the European Union.

Disappointing data

Bloomberg’s ECO Surprise Index, which measures US data against economist estimates, fell to a three-month low at the start of this week, after dropping below zero on September1 for the first time since July 8. That’s helped send the dollar lower against every developed-market peer bar the pound this month.

BNP strategists led by Steven Saywell recommended investors bet the dollar will weaken against the yen in a note to clients dated Sept. 29, “targeting a slide down to 97 in the weeks ahead.”

“Given the uncertainties posed by data and financial conditions dependency, we would not expect markets to price the chances of a December hike significantly higher than the 54% currently reflected in futures,” the note said. “We expect markets to continue to build USD short positions against this backdrop.”

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