Dollar Drops as Fed's Evans Says Rate Increase Makes Him Nervous

  • U.S. currency falls from seven-month high against euro
  • Euro rises on speculation ECB won't exceed dovish market view

The dollar fell from a seven-month high against the euro as a Federal Reserve official stressed that he’d like to see more evidence of strengthening economic growth and inflation, signaling interest-rate increases will be gradual.

The U.S. currency declined versus all of its Group-of-10 peers after Chicago Fed President Charles Evans, among the most dovish of central bank officials, reiterated Tuesday that he expects interest rates to stay below 1 percent by the end of next year, compared with virtually zero now. A report showed manufacturing unexpectedly contracted in November, reflecting the uneven nature of the American economy.

"If we turn out to be correct that interest rates will stay lower for longer versus the market’s consensus, we expect a counter-move in the dollar at some point in 2016, or even conceivably after the Fed move," said Ed Keon, a managing director at Prudential Financial Inc.’s Quantitative Management Associates in Newark, New Jersey.

The dollar weakened 0.6 percent to $1.0633 per euro at 5 p.m. New York time, after touching $1.0558 on Monday, the strongest since April 14. The currency is near $1.0458, a level reached on March 16 that was the strongest since January 2003.

Yellen Views

"I admit to some nervousness about our upcoming decision," Evans, a 2015 voter on the policy-setting Federal Open Market Committee, said Tuesday in remarks prepared for a speech in East Lansing, Michigan.

Fed Chair Janet Yellen is scheduled to speak this week before a Dec. 4 employment report that economists predict will show further improvement in the U.S. labor market. The Bloomberg Dollar Spot Index rose 2.3 percent in November, its biggest monthly gain since July, as futures indicate a 70 percent chance the U.S. central bank will raise its benchmark rate at the Dec. 15-16 policy meeting. 

Currency strength is a dilemma for Yellen as policy makers prepare to boost rates from almost zero. The dollar’s surge, which reduces the cost of imports and makes it harder for prices to rise enough to reach the central bank’s 2 percent inflation goal, may damp the pace of rate increases and punish the U.S. currency against its major counterparts.

“There’s a non-negligible risk that the Fed chair will express renewed concerns about the impact of unwarranted dollar appreciation on the U.S. economy,” said Valentin Marinov, head of G-10 currency research at Credit Agricole SA’s corporate and investment bank unit in London.

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