Dollar Declines as Fed Lowers Projections for Benchmark Rate

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The dollar declined to a three-week low after the Federal Reserve lowered its longer-term projections for U.S. interest rates.

The U.S. currency slid even as the central bank policy makers raised their assessment of the economy and stayed on track to increase interest rates this year for the first time in almost a decade. The reductions in the Fed’s 2016 and 2017 interest-rate projections may reduce the allure of investments in dollar-denominated assets compared with global peers. Fed Chair Janet Yellen said the central bank has no target for the dollar while noting it has been a headwind for U.S. exports.

“It looks in the near term the dollar takes a breather,” Michael Materasso, co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York, said by phone. Yellen “emphasized the timing of the first hike really isn’t that important, it’s more the trajectory and the time frame.”

The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers fell, 0.7 percent to 1,167.85 as of 5 p.m. in New York, reaching the lowest level since May 18. The measure is up 3.3 percent year.

The U.S. currency declined 0.8 percent to $1.1339 per euro. It was little changed at 123.43 yen, after rising as much as 0.9 percent.

Moving Dots

Fed officials maintained their forecast, presented as dots, for the benchmark interest rate at the end of 2015, while lowering it for next year and the year after. The median estimate for the end of 2016 fell to 1.625 percent, compared with 1.875 percent forecast in March.

Meanwhile, futures traders give a 46.5 percent probability that the central bank will raise rates in September, compared with 49.8 percent earlier on Wednesday afternoon, according to data compiled by Bloomberg. The probability of a December liftoff is 77 percent.

“If the market is expecting a much more moderate pace of rate increases then that would be a little bit weaker for the dollar,” said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California. “The trend still favors the dollar,” as the tightening path contrasts with negative rates and bond-buying pursued by the European Central Bank.

The Fed’s latest stance prompted Nomura Holdings Inc. to close the bullish dollar trades against the yen and the euro, Jens Nordvig, managing director of currency research, wrote in an e-mail.

Strategists still forecast the U.S. currency will strengthen for the rest of the year. The dollar will rise to $1.05 versus the euro and to 125 yen, according to the median estimates in Bloomberg surveys.

“We don’t expect the strength of the dollar to be anywhere near what we saw the previous six to eight months, but it’ll certainly be positive,” said Jennifer Vail, head of fixed-income research at U.S. Bank Wealth Management, which manages $126 billion.

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