Dollar Slumps as U.S. Rate-Hike Wagers Subside on Fed Patience

Is Fed Patience a Sign of a U.S. Economy Bounce Back?
  • Yen advances as traders await result of BOJ policy meeting
  • Greenback set to snap three-week rally after Fed comments

The dollar weakened after the Federal Reserve reiterated it will maintain a gradual approach to tightening monetary policy.

The U.S. currency slipped against the yen, which was supported by reduced investor expectations of significant new stimulus being unveiled Friday in the Bank of Japan’s latest monetary policy decision.

A gauge of the dollar fell for a third day as wagers on the Fed raising rates this year edged down to 45 percent, from 49 percent two days ago. Japan’s currency resumed gains amid a report that about a quarter of Japanese Prime Minister Shinzo Abe’s new 28 trillion yen ($267 billion) economic stimulus will includes actual spending. The BOJ’s decision will come after weeks in which differing reports on its intentions whipsawed Japanese assets.

The dollar is set to snap a three-week rally that was driven by speculation that policy divergence between the Fed and its counterparts in Europe and Asia would intensify after reports on jobs, retail sales and industrial production signaled a resilient U.S. economy. That’s losing some momentum with Fed officials in Washington signaling they are in no rush to tighten policy.

Changing Odds

“We did see the odds of a hike creeping back higher ahead of yesterday, they did confirm that, but the language was fairly mild,” John Hardy, the Hellerup, Denmark-based head of foreign-exchange strategy at Saxo Bank A/S. In Japan, “eventual evolution is toward a coordination of fiscal and monetary policy, but the market is afraid that it’s not evident yet,” he said.

The dollar slid 0.6 percent to 104.75 yen at 7:34 a.m. in New York, after advancing 0.7 percent Wednesday. Japan’s currency strengthened 0.4 percent to 116.07 per euro.

A measure of volatility in the dollar-yen overnight exchange rate climbed above 50 percent to the highest since the global financial crisis in 2008.  

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major counterparts, dropped 0.2 percent, reaching the lowest since July 18 on a closing basis.

Almost 80 percent of analysts surveyed by Bloomberg forecast Governor Haruhiko Kuroda and his board will expand the record program at their two-day meeting starting Thursday. The yen has surged almost 15 percent versus the greenback this year, outperforming its developed-market peers, as concern the global economy is slowing spurs demand for safer assets and counteracts the central bank’s currency-weakening stimulus.

“The BOJ news tomorrow will trump the FOMC news last night,” said Imre Speizer, a market strategist at Westpac Banking Corp. in Auckland, referring to the Federal Open Market Committee. “An above-consensus amount of stimulus would surely push dollar-yen higher.”

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