Dollar Declines to One-Week Low as U.S. Rate-Rise Odds Decline

  • Foreign central banks more hawkish than traders realized
  • Run-up to Fed's rate decision damps demand for greenback

The dollar fell to a one-week low on speculation the Federal Reserve may face headwinds as its considers higher interest rates while central banks in the U.K. and Canada signaled confidence in their economies.

The U.S. currency weakened against the pound as Bank of England policy makers said the U.K. economic outlook remains healthy and market turmoil related to China’s slowdown hasn’t shaken their view that the time for a rate increase is approaching. The Bank of Canada said Wednesday that the nation’s economic growth remains on pace.

“What might be hurting the dollar a little bit is the sense that not every foreign central bank is as dovish as maybe some of the traders were hoping,” Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie Capital USA Inc. in New York, said by phone.

The dollar fell 0.7 percent to $1.1280 per euro as of 5 p.m. in New York, after earlier reaching the lowest level since Sept. 1. It dropped 0.1 percent versus the Canadian dollar and 0.5 percent against the pound.

Rate Watch

The greenback has climbed against most of its major peers during the past three months in anticipation of Fed liftoff. 

Fed policy makers meet Sept. 16-17 to determine whether to raise rates for the first time in almost a decade. The central bank has held its short-term rate target at virtually zero since December 2008 to bolster the economy.

“The broader trends are in favor of dollar strength, although there is, in the near term, a little bit of uncertainty around the timing and that could create some of the caution and some of the restraint in the dollar," said Eric Viloria, a strategist at Wells Fargo & Co. in New York.

The Fed will raise its key rate next week, according to the median estimate of economists surveyed by Bloomberg, even as futures traders have pared the odds of an increase to 28 percent, from 38 percent at the end of last month. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

“The dollar is weaker today as there’s less market conviction that the Fed will hike,” said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California.

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