Dollar Plunges Most in 2 Months as Weak GDP Signals Fed on Hold

  • Fed fund futures indicate just 34% chance of rate hike in 2016
  • Investors look to payroll data next week for further clues

U.S. Economy Expands Less Than Forecast

The dollar tumbled the most in almost two months after a report showed U.S. economic growth fell short of expectations in the second quarter, damping speculation the Federal Reserve will raise interest rates this year.

The greenback fell against all 16 major currencies tracked by Bloomberg after the Commerce Department said gross domestic produce rose at a 1.2 percent annualized rate in the April-June period, less than half the 2.5 percent median forecast of economists surveyed by Bloomberg. Fed officials said after their policy meeting this week that "economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”

The dollar had been strengthening this month as traders boosted bets that the Fed would raise rates in the coming months after stronger-than-expected data on jobs, retail sales and industrial production. They’ll now turn their attention to non-farm payrolls data set to be released Aug. 5 for clues on the pace of Fed tightening. The drop in the dollar Friday came after less-aggressive-than-expected monetary stimulus measures from the Bank of Japan sent the yen surging.

"GDP growth is not weak enough to cause panic, but weak enough for the 
Fed not to hike," said Arnab Nilim, a money manager at AllianceBernstein LP, which manages $490 billion in assets. "If non-farm payrolls are stronger, the dollar can come back. Until then, the dollar will be range bound."

The dollar dropped 0.9 percent to $1.1174 per euro as of 5 p.m. in New York. It fell 3.1 percent to 102.06 yen. The Bloomberg Dollar Spot Index tumbled by the most since June 3.

Traders are pricing in a 36 percent probability that the Fed raises rates by the end of the year, based on the assumption that the effective fed funds rate will trade at the middle of the new Fed target range after the next increase. That’s down from almost 50 percent on July 26. Fed policy makers gather three more times this year, with the next meeting set for Sept. 20-21.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE