Dollar Falls to 1-Month Low as Traders See Fed Staying on Hold

Will We See a Greenback Comeback?
  • U.S. currency extends 2016 weakenss after a rally in May
  • Yellen speech backs speculation U.S. economy faces headwinds

The dollar fell to a one-month low on speculation that the Federal Reserve isn’t going to raise rates any time soon.

The greenback dropped against most of its major peers and emerging-market currencies after Fed Chair Janet Yellen said Monday that lingering headwinds for the U.S. economy may take months to resolve. The World Bank cut its outlook for global growth, which is set to expand at an “insipid” pace this year as business spending sags. The greenback extended losses after plunging last week when a report showed employers added 38,000 jobs in May, the lowest monthly reading in almost six years.

“There’s clearly a slow turning of sentiment against the dollar,” said Ulf Lindahl, chief executive officer of currency manager A.G. Bisset Associates, who manages more than $1 billion from Norwalk, Connecticut. “We’ll see the dollar falling over the next six months” against the yen, euro and emerging-market currencies because the Fed will be constrained in its ability to tighten monetary policy, he said.

The currency resumed its slide this month on speculation that the below-forecast jobs data would weaken the case for the Fed to boost borrowing costs. The losses follow a rally in May, when policy makers including Yellen said higher rates in the coming months look appropriate. Hedge funds and money managers may be wrong-footed by the dollar’s latest decline after they boosted net bullish bets last week.

The Bloomberg Dollar Spot Index declined 0.4 percent as of 5 p.m. New York time, to the lowest level since May 6. The U.S. currency was little changed against the euro at $1.1358 and lost 0.2 percent to 107.37 yen.

An index of 20 emerging-market currencies added 0.6 percent and reached the strongest level since May 3.

Fed Watch

Traders see a zero percent chance the Fed will raise interest rates by its June 14-15 meeting, down from 24 percent odds a week ago, futures contracts indicate. There’s a 59 percent probability the central bank will hike by year-end, the data showed.

“The recovery in the dollar has now stalled following Friday’s release of shockingly weak U.S. jobs data and the perception that the Fed is likely to bypass summer rate hike in favor of a move no sooner than September,” said Jane Foley, a senior currency strategist at Rabobank International in London. “We have responded by revising lower many of our one- and three-month forecasts for dollar crosses.”

Hedge funds and other large speculators increased bullish bets on the dollar by 16,719 contracts in the week ending May 31 to a net long position of 84,149, the highest since the period ended March 22, according to data from the Commodity Futures Trading Commission. Strategists still forecast a stronger dollar for 2016.

The U.S. currency is projected to strengthen to $1.10 per euro and 115 yen by the end of the year, according to surveys of analysts by Bloomberg.

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