Dollar Slips as Cautious Fed Seen Countering Gains After Liftoff

  • Yellen has stressed plans for gradual path of rate increases
  • Futures contracts show a 76% probability of a hike Wednesday

Examining the Unknowns of a Federal Reserve Rate Hike

A gauge of the dollar fell for the first time in four days on speculation the Federal Reserve will reiterate that it sees a gradual pace of future interest-rate increases even as it raises borrowing costs on Wednesday.

The greenback slid against all but two of its 16 major counterparts before the central bank’s Federal Open Market Committee begins a two-day meeting, at which it will likely boost rates for the first time in almost a decade, according to futures markets.

While Citigroup Inc. expects the Fed to flag a “flat” path for rates, the second-highest probability is for a dovish surprise, Steven Englander, the bank’s New York-based global head of Group-of-10 currency strategy, wrote in a note on Monday. That scenario would fuel a dollar selloff, he said.

“What will matter is what they signal with the dot chart” that officials use to map out future rate increases, said Charles St-Arnaud, a senior economist at Nomura Holdings Inc. in London. “I think they will bring the dots down to show that the median expectation is for three hikes next year, instead of four as in September.” Some investors are reducing their dollar exposure as a result, he said.

The Bloomberg Dollar Spot Index, which tracks the currency versus 10 counterparts, declined 0.2 percent as of 7:18 a.m. New York time. The currency fell 0.1 percent to $1.1005 per euro, bringing its decline this month to 4 percent.

Volatility Advances

A JPMorgan Chase & Co. index of global exchange-rate fluctuations rose for a fifth day on Monday. It reached 10 percent, higher than the five-year average of 9.6 percent.

With futures contracts showing a 76 percent likelihood that the U.S. will raise its benchmark from near zero on Wednesday, traders are looking past the first increase and contemplating a landscape of relatively low borrowing costs for years to come.

Fed Chair Janet Yellen has emphasized the central bank will follow a gradual path after an initial move, and futures show the federal funds rate will inch higher. That may limit dollar gains.

Slow inflation may limit the argument for future interest-rate increases. Inflation stalled in November from a month earlier, according to the median forecast of analysts surveyed by Bloomberg before the data is published later Tuesday.

The dollar index already has rallied more than 8 percent this year, discouraging investors from going all-in ahead of the Fed meeting without new reasons to buy.

‘Taking Off’ Positions

Market moves are “much more a function of positions being taken off, rather than new ones being put on,” Kit Juckes, a Societe Generale SA strategist in London, wrote in a note on Tuesday.

“The dollar looks to be down on a continuation of positioning-unwind,” said Eimear Daly, a currency strategist at Standard Chartered Plc in London. “Many market participants are closing out or reducing their U.S. dollar long positions ahead of the event. This looks set to be quite a volatile FOMC.” A long position is a bet a currency will strengthen.”

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