Dollar 'Vulnerable' as Fed Rate Pause Seen Until September 2017 - Bloomberg

August 1, 2016
  • Futures signal 36 percent chance of Fed rate increase in 2016
  • Morgan Stanley says worst is yet to come for U.S. currency

  • A gauge of the dollar held close to its weakest level in a month after traders pushed their expectations for a Federal Reserve interest-rate increase out to September next year.

    The Bloomberg Dollar Spot Index slid 1.7 percent last week, its biggest drop since April, which followed an official report that showed second-quarter U.S. gross domestic product expanded at less than half the rate economists had forecast. Morgan Stanleywarned the worst is still to come for the greenback as the economy deteriorates further.

    "The GDP numbers were a disappointment," said Jane Foley, a senior currency strategist at Rabobank International in London. "The markets are trying to get a handle on the Fed, on whether or not it will hike interest rates this year or whether or not it will have enough excuses to delay. So the dollar is looking vulnerable on that front."

    The Bloomberg dollar gauge rose 0.1 percent as of 6:59 a.m. New York time, after sliding 1.3 percent on Friday and touching its lowest level since July 1. The U.S. currency was little changed at $1.1164 per euro. The greenback rose 0.2 percent to 102.22 yen, after tumbling 3.1 percent in the previous session.

    "Dollar-yen is rebounding after being sold off too aggressively," said Takuya Kanda, a senior researcher at Research Institute Ltd. Should U.S. economic data weaken to the point that a Fed rate increase next month is impossible, the the dollar versus yen "could break 100 this week."

    Fiscal Stimulus

    The Bank of Japan said Friday it will almost double its annual exchange-traded fund purchases to 6 trillion yen, while leaving bond buying and its negative deposit rate unchanged. Prime Minister Shinzo Abe is due to unveil a 28 trillion yen fiscal stimuluspackage Tuesday. That plan will now shoulder the main burden of stoking expectations for growth and inflation.

    Futures signal 36 percent odds of higher U.S. rates by year-end according to July 29 pricing. That is down from a 49 percent probability on July 26. The first month where traders see better-than-even odds for an increase has been pushed out to September 2017 from February on July 26.

    The U.S. currency has weakened against all of its 16 major peers since Thursday.

    Investors are underestimating how many times the U.S. central bank will raise interest rates this year and next, but they are probably right about the pace being slower than previously thought, New York Fed President William Dudley said. "It is premature to rule out further monetary policy tightening this year," he said in remarks prepared for a speech Monday at a conference in Bali.

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    Steven Rich
    Sep 17, 2018:
    Well done

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