Dollar heads for worst quarter in five years on rate hike doubts

[March 30, 2016]  By Jemima Kelly

LONDON (Reuters) - The dollar fell broadly on Wednesday and with just one more day left in March headed for its worst quarter in five years against a basket of currencies, as investors wound back their expectations for U.S. interest rate rises in 2016.

The Australian and New Zealand dollars, currencies that are closely correlated with commodity prices, both soared to nine-month highs as oil prices - which are U.S. dollar-denominated - rose and became cheaper for holders of other currencies.

The greenback had hit a two-week high against a basket of major currencies at the start of the week, boosted by a series of hawkish comments from Fed officials that gave investors the impression that U.S. interest rates could increase twice this year, with the first hike coming as soon as April.

But Fed Chair Janet Yellen poured cold water on those expectations on Tuesday, stressing the need to be cautious in raising rates and highlighting external risks including low oil prices and slower growth abroad.

That sent the dollar index down by 0.8 percent on Tuesday - its biggest one-day fall in two weeks. On Wednesday the index was another 0.3 percent weaker, and for the quarter was on track for an almost 4 percent fall.

"She (Yellen) seemed very biased toward the dovish side and the market is taking that as a signal that the Fed is maybe trying to engineer a weaker currency or a more buoyant financial market, or possibly both," Altana Hard Currency Fund manager Ian Gunner said in London.

"It's going to breed a lot of speculation that there is some disagreement on the FOMC (Federal Open Market Committee), which is going to make the minutes next Wednesday quite interesting."

The greenback dipped around half a percent to a nine-day low of 112.135 yen, even as dismal Japanese data heightened speculation that Japan will need to muster more stimulus to avert another recession. Factory output fell 6.2 percent last month from the previous month, the biggest tumble since 2011.

The dollar also lost ground on the euro, which hit an almost-two-week high of $1.1333.

Fed fund futures now have barely a quarter-point hike priced in for this year.

"I think the market is very confused about what it’s supposed to think," said RBC Capital Markets' head of currency strategy in London Adam Cole, adding that the dollar should not fall much further from these levels.

The New Zealand dollar was trading 1.5 percent higher on the day at $0.6965, while the Aussie was up as much as 0.9 percent at $0.7698.

"They're both counterparts to dollar weakness, in large part, as you get the extra layer of leverage through commodity prices being denominated in dollars," said Cole.

(Editing by Mark Heinrich)

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