Dollar Drops to Lowest This Month as Fed Keeps Market on Edge

Fed Decision-Day: Weighing the Impact
  • Markets pricing in 34% chance of rate increase Thursday
  • Increase could be delayed to October, boost dollar, ING says

Will they or won’t they? That’s all the currency market wants to know right now.

A gauge of the dollar touched its weakest level since August and fluctuated as traders and economists failed to reach a consensus on whether the Federal Reserve will raise interest rates Thursday.

The Bloomberg Dollar Spot Index has declined about 0.5 percent in September as fed fund futures show traders expect the Federal Open Market Committee will hold off from making its first increase in the benchmark since 2006 when it concludes a meeting on Thursday in Washington. That’s even as almost one-half of economists in a Bloomberg survey predict the Fed won’t wait any longer to start monetary tightening. The yen declined against 13 of its 16 major peers as Asian equities rose for a second day.

“The market seems to be split,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “This meeting could just prove to be a volatility event. We’re sticking with our dollar bullish view and if we do get a dollar selloff post the meeting that provides opportunities to get back into some long positions.”

A long position is a bet an asset’s price will appreciate.

The Bloomberg Dollar Spot Index was little changed at 1,201.15 at 8:34 a.m. New York time and touched 1,199.34, the lowest since Aug. 26. The U.S. currency weakened 0.3 percent to $1.1323 per euro while adding 0.3 percent to 120.94 yen.

The greenback retreated Wednesday after data showed consumer prices fell last month for the first time since January, adding to headwinds for a Fed liftoff.

Long Odds

Futures show a 30 percent chance the Fed will raise rates Thursday. The probability of a move has fallen from 38 percent at the end of August. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase, compared with the current target rate of zero to 0.25 percent.

Uncertainty about the outcome of the Fed meeting has kept JPMorgan Chase & Co.’s global foreign-exchange volatility index above its 9.64 percent one-year average for the past four weeks. It was little changed at 10.73 percent Thursday.

“Whatever happens, we know the Fed’s communications strategy has somewhat failed here because not only are we uncertain about the outcome but actually the reaction in the near term is quite unclear,” Michael Metcalfe, global head of macro strategy at State Street Global Markets said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. If the Fed were to increase but revise down its rate projections for next year “that should cushion any negative impact on risk and maybe even limit the benefit for the dollar.”

Year-End Forecasts

The dollar has weakened 0.6 percent in the past week, the biggest loser after the yen among 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. Its decline comes even as forecasters predict gains for the U.S. currency versus 14 of its 16 major counterparts by year-end, led by drops in the Swedish krona, euro, Danish krone and yen.

The Fed won’t raise rates Thursday, but could increase next month, Chris Turner, London-based head of currency strategy, said in a Bloomberg Television interview. “With no hike, maybe the dollar sells off very briefly, but if there’s sufficient confidence about a move in October, if we’re right that the short rates do have further to run, I think euro-dollar will end the day lower.”

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