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New York - The dollar slumped to its lowest in more than nine months on Monday as speculation that the Federal Reserve won’t raise interest rates anytime soon spurred a search for yield outside the US.
The Bloomberg Dollar Spot Index, which tracks the currency versus 10 peers, tumbled in New York to its lowest since June as traders pushed back expectations for a rate increase by year-end. Currencies of commodity exporters, including South Africa’s rand, the Brazilian real and the New Zealand dollar, had advanced as investors reallocated money to higher-yielding assets.
Eisuke Sakakibara, the former Finance Ministry official in charge of currency intervention in Japan, said the dollar may drop to ¥100 by year-end.
The Fed is weighing signs of strength in the domestic economy versus slowing growth overseas as policy makers look to raise rates twice this year. Concern that an international slump, particularly in China, will spill over into the US has kept a lid on the central bank’s plans and boosted the appeal of assets overseas.
“The market has generally been trying to trade the weakness in the dollar, and to some extent, the recovery in risky assets,” said Sebastien Galy, director of foreign exchange at Deutsche Bank AG in New York.
“What we’re entering is a period of consolidation in the currency market related to the dollar. Even if we get better data, it will not convince anybody that the Fed is going to shift significantly its policy."
Bloomberg’s gauge of the US currency was little changed at ¥1 174.25 in Tokyo on Tuesday, after sliding 0.4% in New York. The greenback was at $1.1410 per euro from $1.1408. It was at ¥107.93 from ¥107.94.
Scaling Back
Traders see a 48% likelihood of a rate increase in the US before the end of the year, down from 58% a week ago, futures contracts show. Investors have cut bets on the dollar in tandem, reducing net wagers on US currency strength versus eight counterparts to 36 304, the least since July 2014, according to data from the CFTC.
A measure of the greenback’s momentum, known as the 14-day relative strength indicator, has fallen to 30, the level that some traders view as a signal the currency has reached extreme levels and may reverse.
“For the time being, we remain broadly neutral on the greenback’s near-term prospects and we see the current period of consolidative price action as likely to continue this week,” Eric Viloria, a strategist at Wells Fargo & Co. in New York wrote in a note.
Sakakibara, who was dubbed Mr. Yen for his ability to influence the exchange rate in the 1990s, said the dollar may trade at ¥105 in the next few months. The level is “no problem” for Japan’s economy, the 75-year-old Sakakibara, who is currently a professor at Aoyama Gakuin University, said in a Bloomberg Television interview.
