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Singapore - The dollar fell for a second day against its peers, extending a retreat from a seven-month high, as a consensus grew that the Federal Reserve will raise interest rates in December - but then hold off on further increases.
The greenback dropped against all except two of 16 major currencies tracked by Bloomberg after data yesterday showed a gauge of New York manufacturing unexpectedly shrank, even as nationwide factory output expanded.
The mixed picture of the world’s biggest economy mirrored the approach that the Fed seems to be taking on policy, after chair Janet Yellen laid out arguments last week for remaining accommodative without taking a 2016 hike off the table.
“The market has clearly come to a stronger view that they’ll raise rates in December, but that has very little influence on where rates are perceived to go in the longer term,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London.
“In a more normal interest-rate cycle, if the market had moved to discount a December interest-rate hike, it would probably have moved to discount three or four hikes next year, and that’s simply not the case.”
The Bloomberg Dollar Spot Index, which measures the US currency against 10 of its major counterparts, fell 0.2% as of 11:40. It touched the highest level since March last week.
The euro rose 0.1% to $1.1013, while the pound jumped 0.5% to $1.2239. The yen weakened 0.2% to 104.05 per dollar.
Taking profit
The dollar had been doing “extraordinarily well,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander in London.
“People may just be locking in the profit they’ve made over the past month, sitting pretty and seeing how things pan out after the ECB,” he said, referring to the European Central Bank’s policy announcement on Thursday.
The Bloomberg US ECO surprise index - which measures whether economic data have exceeded or fallen short of analysts’ estimates - fell yesterday and is now below zero for the first time in two weeks.
Inflation data are seen as more positive, as in much of the developed world. A report today will show consumer prices rose last month at the fastest pace in almost two years, according to economists surveyed by Bloomberg.
Futures pricing indicates a gradual pace of Fed rate hikes, with traders seeing a 66% probability the central bank will tighten policy by December. The calculations assume that the effective fed funds rate will average 0.625% after the next increase.
Swaps trading implies the rate will be 0.68% in a year, and 0.81% in two years, according to data compiled by Bloomberg.
“The dollar has struggled to gain upside momentum today because of further evidence that the Fed’s tightening cycle will be very gradual,” said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia in Sydney.
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