Sponsored by: Investment Center

Something new in your business?  Click here to submit your business press release

Chamber Corner | Main Street News | Job Hunt | Classifieds | Calendar | Illinois Lottery 

Dollar hits 3-week low vs yen as dovish Fed minutes take a toll

Send a link to a friend  Share

[October 09, 2014]  By Anirban Nag

LONDON (Reuters) - The dollar fell to a three-week low against the yen on Thursday as investors cut favorable bets after minutes of the Federal Reserve's last meeting prompted many to push out expectations for the likely timing of an interest rate rise.

U.S. Treasury yields and the implied rates on Fed fund futures <0#FF:> retreated sharply on word of the minutes, with the market not seeing any appreciable rise in the Fed's target rate until around September 2015, from June 2015 previously.

The dollar, which has a good correlation with U.S. yields and rate expectations, fell 0.5 percent to 107.55 yen <JPY=> on trading platform EBS, its lowest point since mid-September.

The dollar index, which measures the greenback against a basket of major currencies <.DXY>, also shed 0.3 percent to 84.937, its lowest level in two weeks. It had hit a four-year peak of 86.746 on Friday.

"Fed minutes caught the market wrong-footed," said Susanne Galler, currency strategist at Jefferies.

"Considering the hawkish market interpretation of the Fed meeting in September, on the back of higher 'dots', the Fed's more cautious language in the minutes caused some confusion. We see positioning as the key factor for the market's reaction."



Investors have been buying the dollar for 12 straight weeks, its longest winning streak in four decades, helped by a recent string of upbeat U.S. data. The latest nonfarm payrolls released last Friday had led dollar bulls to believe that the Fed might hike interest rates sooner rather than later.

But minutes released on Wednesday suggested the central bank was in no such hurry. In fact, policymakers were worried the recent rally in the greenback might slow the gradual increase in inflation toward the Fed's 2 percent goal.

"This is the first time that the Fed has referenced this in this cycle," Morgan Stanley analysts said in a note. As a result, they said, the dollar is undergoing a correction which is likely to extend further in the near term.

CURRENCY WARS?

The Fed's surprise mention of the dollar's strength has guided investors to stay cautious about buying the greenback at dips and triggered talk of a currency war. The euro zone, Japan and now the United States all seem keen to keep their currencies weak to bolster exports and growth, analysts and traders said.

[to top of second column]

"Keeping interest rates low (by the Fed) will only go so far whilst Europe is in the doldrums. It will essentially create a competition to see who has the weakest currency whilst they both strive to bolster economic growth," said Jon Pryor, head of FX dealing at Investec.

The dollar's rally in the past three months had seen the euro hit a two-year low.

But with the dollar coming under pressure, the euro gained to $1.2791, its highest level in two weeks, and nearly three cents above a two-year trough near $1.2500 set last week. Its gains came despite dismal German export data.

The euro's jump is not good news for the European Central Bank, which is pinning its hopes on a weaker exchange rate. A weaker euro could revive growth through exports and help avert the threat of deflation.

ECB President Mario Draghi, set to speak later on Thursday, is likely to highlight the growing divergence in monetary policy outlooks between the United States and the euro zone and reiterate that the central bank is keeping all its options open -- including quantitative easing.

With the dollar on the back foot, commodity and emerging market currencies got a lift. The Australian dollar rose 0.5 percent to $0.8885, pulling away from a four-year low of $0.8642 set last week.

(Editing by Mark Heinrich)

[© 2014 Thomson Reuters. All rights reserved.]

Copyright 2014 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Back to top