Investors are the least confident in a year that the US dollar is likely to strengthen, shrugging off comments from US Federal Reserve officials that the central bank is still poised to raise interest rates this year.
A gauge of the US currency touched a three-week low even after Fed Vice Chairman Stanley Fischer became the latest policymaker to back the case for a year-end increase in the benchmark, joining William Dudley, Dennis Lockhart and John Williams.
Hedge funds and other money managers last week cut net bullish bets on the US dollar to the least since September last year, helping drive the greenback to the biggest weekly decline since June.
“It does seem as though they’re leaving the option open for a rate hike this year, but at the same time they’re not committing to it either,” said Janu Chan, a senior economist in Sydney at St George Bank Ltd, which is a division of Westpac Banking Corp. “Whatever happens, you’ll get quite a bit of volatility in currencies for the next few months.”
The Bloomberg Dollar Spot Index, which measures the currency against 10 major counterparts, yesterday slipped 0.2 percent to 1,190.60 as of 7:51am in London, after touching 1,190.35, the lowest since Sept. 18. The US currency weakened 0.1 percent to US$1.1369 per euro and depreciated 0.1 percent to ¥120.17. Japanese financial markets were shut yesterday for a holiday.
The outlook for swings in global foreign-exchange rates as measured by a JPMorgan Chase & Co gauge has averaged 10.2 percent this year, up from 7.3 percent last year.
Hedge funds and other money managers cut net bullish bets on the dollar to the least since September last year in the week through Tuesday last week, according to data from the US Commodity Futures Trading Commission in Washington. Wagers that the currency are likely to rise outnumbered those betting it is likely to weaken, by 196,975 contracts.
While the previous two US payroll reports have been “disappointing,” the job market’s prospects for further improvement “look good overall,” Fischer said on Sunday in Lima, where he attended the annual meeting of the IMF.
The economy might be strong enough to merit a rate increase by year-end, though policymakers are monitoring slower domestic job growth and international developments in deciding the precise timing, he said.
Fed Bank of Atlanta President Lockhart last week said he was less confident in the US economy, though he expects the central bank to raise rates this year.
Traders put the probability the Fed will act by December at 39 percent, down from 66 percent on June 30. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after the first increase, versus the current target range of zero to 0.25 percent.
“There is a bit of a disconnect and the market is telling the Fed that they don’t really believe there will be rate hike this year, which explains why the dollar is slightly weaker from last week,” said Bernard Aw, a strategist at IG Asia Pte in Singapore.
“Because of some confidence though among the Fed officials that they could still see a rate hike, I don’t see a substantial dip in the greenback against other major currencies,” he said.
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