Dollar Falls a Third Day as Fed Seen Taking Gradual Rate Path

  • Currency showing ‘some signs of exhaustion’: Societe Generale
  • Dollar unlikely to gain ‘appreciably’ beyond 2016: Westpac

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The dollar fell for a third day against its peers after a core U.S. inflation gauge rose less than forecast in September, suggesting the pace of interest-rate increases by the Federal Reserve will be gradual.

The U.S. currency dropped against most of its 16 major counterparts this week as the chances of a Fed rate hike by December, according to fed fund futures pricing, receded amid mixed signals from the world’s largest economy.

The Bloomberg Dollar Spot Index, which measures the U.S. currency against 10 major counterparts, dropped 0.1 percent as of 8:48 a.m. in New York, having slipped 0.5 percent in the previous two days. It reached the highest level since March last week amid speculation the Fed was getting closer to raising interest rates.

The dollar was little changed at $1.0969 per euro and weakened 0.4 percent to 103.45 yen.

“When we start breaking these levels it’s natural to see a bit of a pause,” said Gavin Friend, a strategist at National Australia Bank Ltd. in London, referring to the seven-month high in the Bloomberg gauge. “It’s even more natural if you take the view that the Fed is signaling it wants to go in December, but there are members of the Fed that mean we actually can’t be sure of that.”

Traders see about a 64 percent probability the central bank will raise rates by December, down from 66 percent at the end of last week. The calculations assume that the effective fed funds rate will average 0.625 percent after the next increase. A Labor Department report Tuesday showed consumer prices excluding volatile food and energy costs rose 0.1 percent from a month earlier.

‘Gradual Pace’

“While I expect the U.S. dollar to strengthen through the end of the year, I’m not sure that it moves appreciably beyond the end of this year,” Robert Rennie, head of financial markets strategy in Sydney at Westpac Banking Corp., said in a briefing in Singapore. While the Fed is likely to tighten in December, June and the end of 2017, there’s a risk the central bank will move at a more gradual pace because of political uncertainties, including the U.S. elections and Brexit, he said.

The European Central Bank is due to announce its decision on monetary policy on Thursday. All 70 economists in a Bloomberg survey forecast that officials will keep the deposit rate at a record-low minus 0.4 percent. There has been speculation that the ECB will began to reduce its bond purchases next year, following a Bloomberg report earlier this month that policy makers led by President Mario Draghi had discussed tapering.

“For the rest of the week it’s about the ECB,” said Kenneth Broux, a strategist at Societe Generale SA in London. “The dollar has done quite well in recent weeks of its own accord but there have been some signs of exhaustion. If Draghi alludes to tapering, that could be dollar positive because equities and periphery bonds may not react very positively to that, so it’s a bit of a safe haven buying in dollars.”

— With assistance by Netty Idayu Ismail, and Narayanan Somasundaram

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