Dollar Poised to Snap Three-Month Rally as Gradual Fed Pace Seen

  • Greenback drops against most of its 16 major counterparts
  • Traders exiting bullish dollar positions before year-end

The dollar is headed for its biggest monthly decline since April, snapping a three-month rally, as investors anticipate a measured pace of interest-rate increases by the Federal Reserve.

The U.S. currency has dropped about 2 percent in December, falling from a 12-year high and paring its advance since mid-2014 to 23 percent. Traders see a 54 percent chance the central bank will tighten policy by April, according to data compiled by Bloomberg based on futures. After lifting rates from near zero this month, Fed Chair Janet Yellen signaled a gradual approach to additional increases.

Dollar Declines Against Most G-10 Currencies This Month
Dollar Declines Against Most G-10 Currencies This Month

Traders are also closing out positions as year-end approaches, exacerbating the dollar’s decline, according to Robert Sinche at Amherst Pierpont Securities LLC. With the Fed raising rates and other central banks adding stimulus, investors have been betting on dollar gains against currencies including the euro, yen, pound, and Canadian dollar.

"As we creep into year-end, you’re getting some folks taking off some positions, and not a lot of people putting on new ones -- it’s pushing the dollar lower against the euro," said Sinche, a global strategist at Amherst Pierpont in Stamford, Connecticut. "We’ll continue to get a widening policy divergence. But it’s not showing up until the Fed makes another move,” so the dollar will lack support until that point.

Rally Snapped

Intercontinental Exchange Inc.’s U.S. Dollar Index, which tracks the currency against six major peers, was down 0.2 percent at 5 p.m. in New York. The gauge climbed on Dec. 2 to the highest since April 2003. The U.S. currency fell 0.4 percent to $1.0957 per euro and by 0.1 percent to 121.07 yen.

The dollar gained the past three months as diverging monetary policies on both sides of the Atlantic supported the U.S. currency. The Fed is on course to increase borrowing costs while the European Central Bank is likely to keep its more accommodative policy.

Yet investors are skeptical that the Fed will be able to raise rates four times next year -- the pace policy makers project -- with commodity prices falling and the global economic outlook looking fragile.

“We’ve seen quite a lot of dollar strength running up to the Fed meeting and now we are trailing off,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. Markets understand that “excessive dollar strength is something that the Fed doesn’t want” and might give the central bank a “reason to hold off with further rate hikes.”

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