Dollar Drops to Three-Week Low as Rate-Boost Outlook Fizzles

  • Central bank's minutes note dollar damping prices, exports
  • Fed officials Dudley, Lockhart still in 2015 liftoff camp

The dollar fell to a three-week low versus the euro as Federal Reserve officials acknowledged volatility in global markets while backing an interest-rate increase by year-end.

A gauge of the greenback posted its biggest weekly drop since June, paring this year’s gain to 5.4 percent. Fed Bank of Atlanta President Dennis Lockhart said he’s less confident in the U.S. economy, though he expects the central bank to raise interest rates in 2015.

William Dudley, president of the Federal Reserve Bank of New York, said he was still in the 2015 camp without pre-committing to liftoff. Minutes of last month’s Federal Open Market Committee meeting, released Thursday, showed officials discussed how strength in the U.S. currency is damping inflation and exports.

“The near-term prognosis for the dollar is challenging,” said Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York. The Fed minutes, combined with signs of cooling U.S. job growth, are “dollar-negative,” he said.

The dollar lost 0.7 percent to $1.1358 per euro as of 5 p.m. New York time, reaching its weakest since Sept. 18. The U.S. currency gained 0.3 percent to 120.27 yen.

The Bloomberg Dollar Spot Index, which measures the greenback’s performance against a basket of 10 major counterparts, fell 1.4 percent on the week.

Hedge funds and other money managers cut net bullish bets on the dollar to the lowest in more than a year, according to data from the Commodity Futures Trading Commission. Long positions, or wagers the currency will rise, outnumbered short bets by 196,975 contracts in the week to Oct. 6, the lowest since September 2014.

“I am slightly less confident today than I was six weeks ago,” Lockhart said Friday in remarks in New York. The risks now versus even a few weeks ago are “a little bit more to the downside, based on the mixed nature of data we are receiving.”

Dudley said he wanted more information about the economy at the time of the September Fed meeting. In separate remarks, Chicago Fed President Charles Evans voiced his support for later liftoff, saying weak overseas economies may weigh on U.S. growth and contribute to downward pressure on inflation for “longer than I anticipate.”

Dollar’s Role

The central bank held rates near zero last month after slowing Chinese growth roiled global markets, though Fed Chair Janet Yellen has said officials expect to tighten policy this year. The minutes noted that the dollar has “strongly appreciated” against emerging-market counterparts and climbed versus currencies of commodity exporters as well as the U.S.’s main trading partners.

The greenback’s gain over the last year restrains inflation and “slows the economy because it makes our goods less competitive,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. in New York. The U.S. currency may rebound to a range of $1.10 to $1.11 per euro in the next four to six weeks, she said.

The probability of a Fed liftoff by December dropped to 39 percent, from 41 percent on Sept. 30. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, versus the current target range of zero to 0.25 percent.

Given the debate over Fed timing, Alessio de Longis, a money manager in the Global Multi-Asset Group at OppenheimerFunds Inc., said he’s reducing bets on dollar gains.

“The dollar could correct lower another 3 to 5 percent” this quarter, he said by phone from New York. “I’ve been reducing the dollar-long bias gradually since the last Fed meeting.”

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