The dollar fell versus most of its major peers after a report showed U.S. wages rose last quarter at the slowest pace on record, weakening the case for the Federal Reserve to increase interest rates in September.
The Bloomberg Dollar Spot index wiped out this week’s gains on the data. The rally had stemmed from the July 29 Fed post-meeting statement, when the central bank moved closer to raising rates, and from data Thursday showing the world’s biggest economy gained momentum in the second quarter. A Fed-preferred inflation gauge tied to consumer spending will be released Aug. 3.
“It’s not good for the dollar if we get another soft inflation number next week,” said Matt Derr, a foreign-exchange strategist at Credit Suisse Group AG in New York. It’s “very hard for the market to price in seriously a September hike at that point. There are reasons to be cautious on the dollar.”
The Dollar Spot Index dropped 0.2 percent to 1,208.44 at 5 p.m. in New York. It reached 1,215.35 yesterday, the strongest since March, when it touched a record high in data going back to 2004. The gauge halted five straight weeks of gains.
Traders are pricing in a 38 percent probability that the Fed raises rates at its September meeting, based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff. That compares with 48 percent Thursday.
“I’m in the December camp -- I think the Fed talks hawkish but acts dovish,” Douglas Borthwick, head of foreign exchange at New York brokerage Chapdelaine & Co., said by phone.
The 0.2 percent advance in wages was the smallest since records began in 1982 and followed a 0.7 percent increase in the first quarter, the Labor Department said Friday. The agency’s employment cost index, which includes benefits, also rose 0.2 percent in the second quarter from the prior three months.
The lack of improvement in wage growth casts doubt on whether the economy warrants an imminent rise in borrowing costs. Fed Chair Janet Yellen and her colleagues are counting on rising wages to bring inflation closer to their 2 percent goal. The setback may prompt some officials to call for a delay in the first rate increase since 2006 and a slower tightening path thereafter.
A price index tied to consumer spending may have increased 0.2 percent in June, according to a Bloomberg survey of economists. This inflation measure is preferred by Fed policy makers and hasn’t met their 2 percent target since April 2012.
Fed officials “may be overestimating gross-domestic-product growth and underestimating the downward pressures on the unemployment rate from mediocre growth,” Steven Englander, New York-based global head of G-10 currency strategy at Citigroup Inc., wrote in a research note. This may “bring an end to the Fed-hiking cycle sooner and at lower rates than anticipated, leading to the mother of all dollar sell-offs once this becomes clear.”