Dollar Drops From 7-Month High Against Euro Before Fed Minutes

  • Central bank may highlight mixed nature of economic data
  • Futures traders see 66% chance of liftoff in December

The dollar retreated from a seven-month high against the euro as investors reduced positions in the U.S. currency in case minutes from the Federal Reserve’s October meeting damp the outlook for a December interest-rate increase.

The Bloomberg Dollar Spot Index was little changed as market participants awaited signals about the timing and pace of eventual Fed rate increases. Fed Chair Janet Yellen and other policy makers made numerous pronouncements in the past month that it may be appropriate to boost rates from near zero at their Dec. 15-16 gathering. The probability the central bank will act next month has risen to 66 percent from 50 percent at the end of October, futures contracts show.

"There is a little bit of defensive play," said Eimear Daly, a currency strategist at Standard Chartered Plc in London. "Anything that slightly jeopardizes December, and long dollar positions will be vulnerable," she said, referring to bets that the greenback will rise.

The dollar weakened 0.2 percent to $1.0662 to the euro as of 8:53 a.m. in New York, after appreciating to $1.0631 on Tuesday, the strongest level on a closing basis since April 13. The U.S. currency was little changed at 123.44 yen, following a two-day gain of 0.7 percent.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, traded at 1,235.67. The measure traded near its highest in more than a decade.

Appreciation Question

“The October minutes could be perceived as dovish if they highlight policy makers’ concerns about the renewed appreciation of the dollar and the tightening in U.S. financial conditions evident in the rates markets,” said Valentin Marinov, the head of Group-of-10 currency research at Credit Agricole SA’s corporate and investment bank unit in London. “I doubt that the Fed could be much more hawkish than the market is expecting.”

The likelihood of December liftoff have climbed from as low as 33 percent on Oct. 2, according to futures data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

Underscoring the divergence between the Fed and other developed-market central banks, European Central Bank officials said they will reexamine their monetary stimulus program in December. ECB President Mario Draghi said on Nov. 12 that risks to the euro-zone economy are “clearly visible” and reiterated that policy makers meeting next month will take another look at the stimulus they’re providing.

While the Bank of Japan last month refrained from stepping up its policy response, the central bank is expanding its monetary base at an annual pace of 80 trillion yen ($650 billion). The BOJ meets Thursday.

“On a short-term basis you might see some volatility, but the dollar’s going to be pretty resilient against everything else,” according to Kelvin Tay, regional chief investment officer at UBS Group AG’s wealth-management business, in Singapore.

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