Dollar Falls to Five-Month Low on Slower Fed Rate Path Outlook

Dovish Fed Chair Yellen Stresses Gradual Approach
  • U.S. currency heads for biggest quarterly loss since 2010
  • Emerging-market currencies benefit from greenback decline

The dollar fell to a five-month low against the euro on speculation the Federal Reserve will take a slower path to higher interest rates as the central bank factors in headwinds from slowing global economic growth.

A gauge of the U.S. currency headed for the biggest quarterly loss since 2010 after Fed Chair Janet Yellen said Tuesday the central bank will act “cautiously” as it looks to withdraw monetary stimulus. The greenback has fallen against all of its 31 major peers in March with Russia’s ruble and Brazil’s real posting the biggest gains, helping emerging-market currencies to their best month in 18 years.

After the Fed raised rates in December for the first time in almost a decade, comments by policy makers have spurred investors to reassess forecasts for the greenback. The currency has slumped more than 5 percent since the end of January as the outlook has dimmed for policy divergence between a tightening Fed and central banks in Europe and Asia that are expanding monetary stimulus.

"The dollar is overvalued, particularly against the major currencies, euro and yen," said Steven Saywell, BNP Paribas SA’s global head of foreign-exchange strategy in London, in an interview on Bloomberg Television. "Euro-dollar will continue to move higher." 

QuickTake The Almighty Dollar

The bank expects the dollar to weaken to $1.14 per euro by the end of the month and $1.16 in the second quarter.

The greenback lost 0.4 percent Wednesday to $1.1338 per euro as of 5 p.m. in New York, the weakest level on a closing basis since Oct. 21. The dollar dropped 0.2 percent to 112.43 yen.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major peers, fell 0.4 percent. The gauge has slumped about 4 percent this quarter, the most since the period ending in September 2010.

Trouble Abroad

During the past three days, Bloomberg’s dollar index has more than wiped out its gains from last week, when policy makers including St. Louis Fed President James Bullard and San Francisco Fed President John Williams said an interest-rate increase as soon as next month was possible.

Since Yellen spoke, traders have cut the likelihood of a move by the April Fed gathering to zero, and lowered the probability of an increase in June to 20 percent from 46 percent a week ago. That’s based on the assumption that the effective fed funds rate will trade in the middle of the new target range after the next increase.

Global developments, particularly those in China, pose ongoing risks to the Fed’s outlook, Yellen said in her speech to the Economic Club of New York.

Chicago Fed President Charles Evans, who doesn’t vote on policy this year, said in New York on Wednesday that a “very shallow path -- such as the one envisioned by the median FOMC participant in March -- is the most appropriate path for policy normalization over the next three years.”

Companies took on 200,000 workers in March, according to figures Wednesday from the Roseland, New Jersey-based ADPResearch Institute. The median forecast in a Bloomberg survey called for a 205,000 March jobs advance, compared with a 242,000 increase the month before, with the unemployment rate holding at 4.9 percent. 

Fed policy makers meeting earlier this month in Washington cited “additional strengthening of the labor market” even as they held off on raising the benchmark interest rate.

“The dollar’s been on the defensive for much of 2016,” said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto. “The bar for the dollar to respond to positive numbers is quite significantly higher.”

(An earlier version of this story was corrected to fix the degree of the dollar’s decline in the second paragraph.)

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