The dollar dropped to a one-month low against its major peers after the Federal Reserve said it will keep interest rates at almost zero for a “considerable time.”
The U.S. currency fell for a second day against the euro, the first back-to-back declines this month, while the pound climbed to a more-than-five-year high as the Federal Open Market Committee cut the outlook for economic growth at yesterday’s policy meeting. Emerging-market currencies rallied as volatility slid to a record amid demand for higher-yielding investments. Norway’s krone tumbled the most in a year versus the euro as the central bank said it may cut interest rates.
“The FOMC wasn’t as hawkish an event as people expected, even with solid fundamental strength in the economy,” said Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. “The dollar is more or less on a neutral footing.”
The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 counterparts, dropped 0.1 percent to 1,010.32 at 5 p.m. New York time, after touching 1,008.19, the lowest since May 21.
The greenback weakened 0.1 percent to $1.3608 per euro, adding to a 0.4 percent slide yesterday. It’s set for its first two-day drop since the period through May 30. The U.S. currency was little changed at 101.94 yen. The euro strengthened 0.1 percent to 138.72 yen.
The Canadian dollar rose 0.2 percent to C$1.0818 versus the dollar and reached the strongest level since Jan. 8 before a government report tomorrow that may show inflation accelerated to 1.5 percent in May from a year earlier, according to the median estimate of economists in a Bloomberg survey.
The Swiss franc climbed 0.1 percent to 1.21662 per euro even as the central bank pledged to defend its 1.20 ceiling on the franc against the shared currency. Swiss National Bank President Thomas Jordan said policy makers are “closely monitoring” market reaction to the European Central Bank’s stimulus campaign for the euro region and would take further action if necessary.
India’s rupee strengthened the most in a month, amid a rally in Asian currencies after they had been buffeted this week by higher oil prices caused by violence in Iraq.
The rupee gained 0.5 percent to 60.0863 per dollar, the biggest advance since May 22, Indonesia’s rupiah climbed 0.5 percent to 11,934 per dollar and the Philippine peso strengthened 0.6 percent to 43.83 per dollar.
JPMorgan Chase & Co.’s Global FX Volatility Index fell to 5.56 percent, the least since Bloomberg started collecting the data in 1992, boosting demand for carry trades, where investors seek to profit from differences in interest rates.
Norway’s krone slumped 1.9 percent to 8.3280 per euro, reaching the biggest drop since June 2013, after central bank Governor Oeystein Olsen said a further weakening of the outlook for the economy “may warrant a reduction in the key policy rate.” The Oslo-based Norges Bank kept the deposit rate at 1.5 percent for a 14th consecutive meeting today as predicted by all 22 economists in a Bloomberg survey.
Bank of England Chief Economist Andrew Haldane said the choice of when to raise interest rates is “a difficult one.” BOE Governor Mark Carney said on June 12 that the first interest-rate increase “could happen sooner than markets currently expect.” Sterling has risen against all of its developed-country peers in the past month as investors pushed forward their expectations of when policy makers will raise the main interest rate.
“If it’s a choice between central banks that are keeping rates low for a very long period of time or a central bank that is actually relatively hawkish, I think it’s quite simple,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “Sterling is the one out of all the Group-of-seven currencies that’s got the opportunity to do something quite significant.”
The pound advanced 0.3 percent to $1.7039, reaching the highest since October 2008.
Sterling rallied 3.4 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar weakened 1.4 percent, the euro declined 2 percent and the yen rose 1 percent.
While Fed officials predicted their target rate would be higher at the end of 2015 and a year later than previously forecast, they lowered their long-run estimated rate to 3.75 percent from 4 percent, reflecting slower long-term growth for the economy.
Officials have kept the federal funds target rate at zero to 0.25 percent since 2008 and there’s an 94 percent chance Fed Chair Janet Yellen will keep it there by the end of this year, according to futures data compiled by Bloomberg.
Benchmark U.S. 10-year yields rose four basis points, or 0.04 percentage point, to 2.62 percent after dropping seven basis points yesterday.
“It’s clear from the price actions that the market was leaning towards risk of the FOMC taking a more hawkish stance and clearly it wasn’t the case,” said Brian Daingerfield, currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “The weakness in dollar is position-related, the market was skewed towards risks being the other way.”