Dollar Heads for Biggest Weekly Loss in a Month on Gradual Fed

  • U.S. currency declines versus nine of its G-10 peers this week
  • Euro drops first time in three days on ECB stimulus outlook

A gauge of the dollar headed for its biggest weekly loss in a month after Federal Reserve officials said policy should only be tightened gradually once they start raising interest rates.

The greenback has weakened versus all its Group-of-10 peers except Norway’s krone this week as Vice Chairman Stanley Fischer said Thursday the Fed’s decision to delay raising rates has helped to offset economic headwinds caused by a stronger dollar. Policy should be tightened only slowly after liftoff, New York Fed President William C. Dudley said. The euro fell for the first time in three days Friday amid speculation the European Central Bank will expand stimulus next month.

“Markets are now in the process of reaffirming a December rate hike, making it difficult for the dollar to extend gains,” said Masashi Murata, vice president at Brown Brothers Harriman & Co. in Tokyo. “But the monetary divergence framework of those seeking to raise rates and those keeping an accommodative monetary stance remains intact and underpins the dollar.”

The Bloomberg Dollar Spot Index, which tracks the currency versus 10 major peers, fell 0.3 percent this week to 1,228.39 at 6:45 a.m. in London, the biggest drop since the period through Oct. 9. The gauge closed at 1,226.09 on Thursday.

The euro fell 0.3 percent to $1.0780 after gaining 0.8 percent in the previous two days. The shared currency slid 0.3 percent to 132.25 yen. The dollar was little changed at 122.66 yen.

Bullard, Lacker

Fed Bank of St. Louis President James Bullard, one of the several other officials speaking on Thursday, said keeping rates near zero was no longer needed with jobs and inflation gains near the central bank’s goals. Fed Bank of Richmond President Jeffrey Lacker said caution was warranted in policy responses to financial markets.

There’s a 66 percent chance Fed officials will raise their target rate by their December meeting, according to data compiled by Bloomberg based on futures contracts. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

“The market thinks the Fed will hike in December and it’s not fully priced in,” said Imre Speizer, markets strategist at Westpac Banking Corp. in Auckland. “Once you get to December and they hike, there is scope for a positive response in the dollar.”

Third Worst

The euro has slumped 5.3 percent against the dollar in the past month, the third-worst performer among G-10 currencies. It has fallen 2.9 percent versus the yen.

President Mario Draghi signaled Thursday the ECB was ready to boost stimulus programs at its Dec. 3 meeting as inflation wanes and economic prospects worsen.

“The news overnight only reinforced the case for a weaker euro,” Greg Gibbs, director of Amplifying Global FX Capital in Singapore, wrote in a client note Friday. “The most popular position at the moment is probably long the U.S. dollar, where rates appear set to rise, against the lowest and negative-yielding major currency, the euro.”

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