Dollar Falls Most in One Month as Fed Signals Shallow Rate Path

  • Central bank meeting minutes show December liftoff possible
  • Yen advances after BOJ leaves policy unchanged at meeting

The dollar fell the most in more than one month as Federal Reserve policy makers signaled the pace of interest-rate increases would be gradual.

The greenback depreciated after minutes Wednesday from the Federal Open Market Committee’s October meeting stated that December liftoff “may well become appropriate” while signaling a shallow path for any increases next year. The euro rebounded from a seven-month low and the yen extended gains after the Bank of Japan refrained from expanding stimulus.

"The market’s beginning to look beyond December to the trajectory of Federal Reserve policy during 2016," said Jane Foley, senior foreign-exchange strategist at Rabobank International in London. "The dollar can still rally but I don’t think we’re going to see the kind of momentum that we saw at the start of the year against the euro."

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, fell 0.7 percent to 1,227.44 as of 5 p.m. in New York, the largest drop since Oct. 14. It reached the highest level in more than a decade on a closing basis Wednesday.

The dollar weakened 0.7 percent to $1.0734 per euro after appreciating to $1.0617 on Wednesday, the strongest since April. The U.S. currency dropped 0.6 percent to 122.87 yen, halting a three-day advance.

Gauging the Fed

The kiwi headed for its biggest advance this month and the Aussie rose as investors sought out the highest-yielding assets.

“What’s important now is not the December move, that’s priced in, it’s what the path is going to be after that,” said Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets.

The greenback has climbed against all of its 16 major peers this year as a strengthening U.S. economy underpinned speculation that the Fed will raise interest rates for the first time in almost a decade. Analysts are forecasting its gains versus the yen and the euro have already peaked, with the median predictions from Bloomberg surveys calling for the dollar to hold at about 123 yen by year-end and weaken to $1.08 per euro.

The likelihood of higher rates by year-end is 66 percent, futures show. The probability the Fed will act next month has increased from 50 percent at the end of October. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

“The market has grown comfortable with the idea of a dovish hike,” said Mark Dowding, a London-based partner and money manager at BlueBay Asset Management, which oversees $60 billion. “We are pretty much at the cycle high for the dollar on a trade-weighted basis. Given what the Fed said in the minutes, it doesn’t look as if there is a lot of money to be made at this point by having a very long dollar exposure.”

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