Dollar's Post-Fed Rally Stalls as Focus Shifts to U.S. Economy

Updated on
  • Greenback is close to strongest level since August versus euro
  • Fed statement rekindles prospect of rate liftoff in December

The dollar weakened from the strongest level in more than two months versus the euro as investors looked beyond the growing probability of a Federal Reserve interest-rate increase this year to focus on U.S. economic growth.

The greenback weakened for the first time in three days as a report showed the U.S. economy expanded at a slower pace in the third quarter, while economic confidence in the currency bloc unexpectedly rose this month. A gauge of the dollar dropped as traders boosted wagers on the prospect of a liftoff in interest rates this year.

While the Fed kept its benchmark rate at a record low, its Wednesday statement dropped a reference to global risks and referred to its “next meeting” in December as it discussed the timing of policy tightening.

"It’s a very small reaction" to the U.S. growth data, said Christin Tuxen, a senior analyst at Danske Bank A/S in Copenhagen. "What will be more important is the employment cost index tomorrow -- that will be more important for the Fed and hence also for the markets, and notably, the dollar.”

The dollar weakened 0.5 percent to $1.0977 per euro as of 5 p.m. New York time after appreciating to $1.0897 on Wednesday, its strongest level since Aug. 7. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, declined 0.3 percent to 1,214.93, having touched its highest since August on Wednesday.

Fed Prospect

“It’s just a pullback in the dollar after a big move,” said Lee Hardman, a London-based currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “The Fed have given a signal they are still on course to raise rates in December, so the markets have moved toward pricing in a 50-50 probability.”

He added that the Fed tightening policy this year was still “not a done deal,” so markets will need to see economic “data support the case for a hike in December.”

Futures markets show a 50 percent chance of the Fed raising rates by its meeting in December, up from 35 percent Tuesday. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

The Fed’s stance of moving towards tighter policy contrasts with the European Central Bank after President Mario Draghi last week primed investors for an expansion of quantitative easing and the possibility of another cut in the ECB’s deposit rate.