The US dollar fell against most of its major peers this week as a report showing flat US producer prices left traders doubting the US Federal Reserve would increase interest rates this month for the first time since 2006.
Economists are split over whether policymakers will alter the benchmark at their meeting on Wednesday and Thursday, while fed fund futures indicate an even slimmer chance of a move. Central bank policy drove currency markets.
Australia’s dollar staged its biggest weekly advance in two years, with traders reducing bets the Reserve Bank of Australia would cut its cash rate by the end of the year. Sweden’s krona jumped after a report showed its economy expanded faster in the second quarter than originally estimated.
“I could see why people want to de-risk heading into the meeting,” said Daniel Brehon, a New York-based currency strategist at Deutsche Bank AG. “The dollar longs are still the consensus position out there. To the extent that all positions are being wound down, the dollar’s going to fall in the leadup to the Fed.”
The greenback weakened 1.7 percent this week to about US$1.1340 per euro. It rose 1.3 percent to ￥120.59.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, had its first weekly decline since last month. On Thursday, the index touched the lowest since Sept. 1.
LACK OF DRIVERS
“The case for September is not as compelling now, but, at the same time, it hasn’t been ruled out,” said Win Thin, the New York-based global head of emerging-market strategy at Brown Brothers Harriman & Co.
“There’s been really no fundamental drivers this week, that’s the frustrating thing. So in the absence of any new fundamental news, the markets are sort of treading water and going with this theme of: ‘Oh yeah, maybe the Fed won’t hike,’” Thin said.
US wholesale prices were little changed last month, US Department of Labor figures showed on Friday.
The dollar’s decline marks a reversal of fortune as investors question the outlook for higher US interest rates. The currency climbed against most of its major peers during the past three months in anticipation of a Fed liftoff, with Brazil’s real, the New Zealand dollar and South African rand the biggest losers.
Brazil’s real volatility climbed to a six-month high as traders weighed whether Standard & Poor’s move to cut the nation’s credit rating to junk will prompt lawmakers to work with the government to shore up the budget.
One-week implied volatility on options for the real, reflecting projected shifts in the exchange rate, increased to 26.45 percent Friday, the highest among 16 major tenders tracked by Bloomberg. The currency dropped 0.6 percent to 3.8708 per dollar, the lowest in almost 13 years as commodities fell. It’s down 0.7 percent this week.
INTERVENTION IN TAIPEI
In Taipei, the US dollar fell against the New Taiwan dollar on Friday, shedding NT$0.146 to close at NT$32.71 after the local currency tracked the Chinese yuan to move higher, dealers said.
Trading volume in the local foreign exchange market remained moderate as traders stayed on the sidelines ahead of the Fed meeting, although Taiwan’s central bank continued its intervention to slow down the pace of the NT dollar’s appreciation, they said.
Futures show a 28 percent chance the Federal Open Market Committee will announce a rate increase when it meets next week. The probability was 30 percent a week ago and 38 percent on Aug. 31. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.
“The market is comfortable that the Fed won’t raise rates next week,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd in London.
“The dollar would benefit from a rate hike next week because the market is so dovishly priced. It would reinforce selling pressure in particular for emerging-market currencies,” he said.
Additional reporting by staff writer, with CNA
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