Dollar Drops as Fischer Says Rate-Increase Path Won’t Be Smooth

The dollar extended the biggest weekly decline in three years after Federal Reserve Vice Chairman Stanley Fischer said there won’t be a “smooth upward path” for interest rates even as the first increase may be warranted before the end of 2015.

The greenback dropped against all of its 16 major peers as Fischer, in remarks at the Economic Club of New York, said subsequent rate increases will be subject to economic and geopolitical events. While policy makers undermined the dollar last week when they cut projections for higher borrowing costs, the U.S. currency still is set for a ninth month of gains as the Fed moves toward raising rates while global peers including the European Central Bank are adding to stimulus.

“The dovish remarks from Mr. Fischer raise the risk for a larger correction in the U.S. dollar,” David Song, a New York-based currency analyst at FXCM Inc., wrote in an e-mail. “But the long-term outlook remains bullish for the greenback, as the central bank remains on course to raise the benchmark interest rate this year.”

The Bloomberg Dollar Spot Index fell 0.9 percent to 1,184.28 at 5 p.m. in New York after touching 1,183.79, the lowest level since March 6. It tumbled 2.2 percent last week, the biggest weekly decline since October 2011.

The yen gained 0.3 percent to 119.73 per dollar after adding 1.1 percent last week, its first weekly gain in more than a month. The euro rose 1.2 percent to $1.0946 after earlier weakening as much as 0.5 percent.

‘Notable Drag’

“A smooth path upward in the federal funds rate will almost certainly not be realized” as the economy will encounter headwinds such as the surprise plunge in oil prices, Fischer said. He said while forward guidance on rates remains important, its role may diminish.

“The renewed impetus on data dependency came through strongly,” Daniel Brehon, a New York-based strategist at Deutsche Bank AG, said in a phone interview. “For the dollar trade, we’ll need stronger signal from the Fed that they’re going to hike in Q3, as opposed to just being ambiguous.”

Despite recent losses, the dollar has gained 18 percent in the past year, the best performance among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro declined 8.8 percent, while the yen has dropped 0.7 percent.

ECB Buying

ECB President Mario Draghi told the European Parliament earlier on Monday that growth in the region was gaining momentum, and pointed to the 60 billion euros ($66 billion) monthly bond-buying program as a key factor. He said he sees no signs that there will not be enough bonds to purchase.

Fischer said that while the ECB’s bond purchases have served to strengthen the dollar, they are a net benefit to the U.S. economy by spurring growth in Europe and demand for American exports. He said much of the dollar’s appreciation reflects other factors, including the stronger performance of the U.S. economy relative to the euro area.

“Mr. Fischer is the dean and the one with the best idea as to how much the dollar matters for the U.S.,” said Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, said in an e-mail. “His assessment confirms that we are on the way to a normalization of policy, but there is at this point no sense of urgency.”

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