Dollar Rally Attempt Stalls With Fed Still Divided on Rate Hike

  • Tightening likelihood slips after meeting minutes released
  • Greenback has run out of steam, will break lower: Prudential

How Investors Are Reacting to the FOMC Minutes

The dollar’s attempt to rally from a three-month low ran into a roadblock after minutes from the Federal Reserve’s July meeting showed officials still divided on whether an interest-rate increase was needed soon.

The U.S. currency pared gains after an account of the meeting showed policy makers weighing jobs-market strength versus little risk of a marked pickup in inflation. The dollar had climbed earlier on indications from New York Fed President William Dudley and Atlanta Fed President Dennis Lockhart that officials might lift borrowing costs as soon as next month.

“We’ve basically seen the dollar run out of steam,” said Robert Tipp, chief investment strategist in Newark, New Jersey, for the fixed-income division of Prudential Financial Inc., which manages $621 billion. “We’re ultimately going to see the dollar break lower versus developed currencies,” particularly the yen, he said.

The greenback has slumped more than 5 percent this year as Fed policy makers have yet to see signs that inflation is moving toward their 2 percent goal. That means the U.S. central bank is less likely to diverge from the paths of the Bank of Japan and European Central Bank, which are boosting monetary stimulus as they seek to spur flagging growth.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, was 0.2 percent higher as of 5 p.m. in New York, after gaining as much as 0.5 percent. The gauge fell the three previous days and reached the lowest level since May. The greenback was little changed Wednesday at $1.1289 per euro and 100.28 yen.

Futures contracts show about a 51 percent likelihood of a rate increase by December, down from 52 percent before the minutes were released. The central bank left rates unchanged last month, but said in a post-meeting statement that “near-term risks to the economic outlook have diminished.”

Data show a mixed picture of the economy. While a stronger-than-forecast labor report this month stoked optimism, stagnant retail-sales data last week fueled some skepticism over the outlook.

The Fed “certainly gave no indication that they were on the brink of pushing the button -- that could be seen as slightly dovish relative to market positioning,” said Steven Englander, global head of Group-of-10 currency strategy at Citigroup Inc. in New York.

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