Dollar Falls Most Since August Meltdown as Fed Keeps Zero Rate

  • Central bank cites global financial turmoil, low inflation
  • Markets are 'settling in for a long period of uncertainty'

The dollar fell the most since the August market meltdown triggered by China’s currency devaluation after the Federal Reserve held off on raising interest rates.

The U.S. currency reached a three-week low after the central bank declined to boost its short-term interest-rate target, opting to delay an increase amid stubbornly low inflation, an uncertain outlook for global growth and recent financial-market turmoil.

“They’re concerned about growth outside of the U.S., and I’m not sure if that’s good for foreign currencies, especially in developing markets,”  Michael Materasso, co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York, said by phone. “The emphasis on the global economy is quite surprising.”

The Bloomberg Dollar Spot Index dropped 0.6 percent to 1,193.93 as of 5 p.m. in New York, reaching the lowest level since Aug. 24. The U.S. currency declined 1.3 percent to $1.1432 per euro and lost 0.5 percent to 120.01 yen.

Dollar Path

The dollar had rallied against all of its major peers in the yearlong run-up to the Fed meeting. It’s the best performer among 10 developed-nation peers in the last year, gaining about 15 percent, according to Bloomberg Correlation-Weighted Indexes.

Speculation that Fed policy makers would raise rates, in contrast to easing by the European Central Bank and Bank of Japan, propelled the U.S. currency to a 12-year high against the euro in March. It surged to a 13-year peak versus the yen in June.

In holding their benchmark federal funds rate at zero to 0.25 percent, Fed policy makers showed they are still not convinced inflation will move gradually back to their 2 percent target, despite continued gains in the labor market. Unemployment in August fell to 5.1 percent, its lowest level since April 2008.

Money markets are expecting the Fed to wait until 2016 to increase rates. Futures traders are pricing in a 19 percent probability the central bank increases it target range in October and a 45 percent chance by the December meeting and a 53 percent likelihood by January. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase, near the mid-point of the range.

Fed Watch

"It’s a little bit of a dovish development here and the dollar’s obviously selling off," said Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange Inc. in Washington. "The actual outcome was not a major surprise, but I think the statement was somewhat more dovish than I was expecting."

International economic and financial developments may restrain economic activity and weigh on inflation, the Federal Open Market Committee said in a statement.

“In the very near term, you could easily see the U.S. dollar decline” because of offshore risks to the U.S. economy, said Atul Lele, who manages $2 billion as chief investment officer of Nassau, Bahamas-based Deltec International Group. He said he ’s still bullish on the currency in the medium term, citing the strengthening U.S. economy relative to its global peers.

The Fed’s decision follows a volatile period in financial markets after China’s shock devaluation of the yuan last month clouded the outlook for global growth, sending equities down.

Currencies across commodity-exporting nations and emerging markets tumbled, with South Africa’s rand falling to a record. Since then, the turmoil has eroded some of the greenback’s gains against developed-nation currencies including the euro, yen and Swiss franc.

The dollar is predicted to strengthen to $1.07 against the euro by the end of this year, after a 14 percent surge last year, according to the median forecast of analysts surveyed by Bloomberg News. The greenback’s forecast to gain to 125 yen by the end of 2015.

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