Dollar Weakens as Investors Look to Fed for Policy Rate Signals

  • G-7 volatility reaches its highest level since December 2011
  • Central-bank meetings, Brexit vote in U.K. confront traders

The dollar slipped against major currencies as the Federal Reserve concludes its two-day meeting and is poised to guide financial markets with an updated outlook on its policy path.

Volatility in the currency market surged to the highest in four and half years, as the Fed meeting, together with central-bank gatherings in Japan and the U.K., coincide with Britain’s vote on European Union membership and Spanish elections within the span of two weeks. Lower-than-forecast U.S. jobs data earlier this month wiped out bets of an imminent interest-rate increase by the Fed, with all 77 economists surveyed by Bloomberg predicting the Fed will keep interest rates unchanged.

“The markets have taken a pause for breath,” said Petr Krpata, a London-based foreign-exchange strategist at ING Groep NV. “After big moves you have some stability, but we still think risk appetite will remain fragile going into the EU referendum.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, declined 0.3 percent as of 11:50 a.m. New York time. The JPMorgan Chase & Co. Group of Seven Volatility Index rose to 12.79 percent, the highest since December 2011.

Futures traders ruled out any chance of a U.S. rate increase when the Fed concludes its two-day policy meeting Wednesday, while the odds of an increase by December were at 48 percent, down from 76 percent at the start of the month.

“In its data-dependency posture, we think the Fed must keep the door open to a July move,” analysts at Brown Brothers Harriman, including global head of currency strategy Marc Chandler, wrote in a note to clients. “We expect the dot plots to be consistent with two hikes this year, but suspect that next year’s four hikes may be trimmed.”

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