Waning Fed rate hike expectations push dollar index to five-week lows

[June 08, 2016]  By Anirban Nag

LONDON (Reuters) - The dollar hit a five-week trough against a basket of currencies on Wednesday, hurt by waning expectations that the Federal Reserve will raise interest rates anytime soon.

The dollar index, which tracks the greenback against a basket of six rivals, edged down 0.1 percent to 93.740 after dropping as low as 93.68, its lowest since May 6.

Against its Japanese counterpart, the dollar slipped 0.25 percent to 107.15 yen, after hitting a low of 106.72 earlier. It climbed from those lows after data showed that China's imports beat forecasts in May, adding to hopes that the economy may be stabilising.

Nevertheless, traders are convinced the dollar will struggle to gain higher ground unless incoming data beats expectations. Investors have almost priced out the chance of a rate increase at the Fed Reserve's June 14-15 policy review, and reduced the likelihood of a July rate hike to around 26 percent.

With worries about Brexit also gathering, investors are uncertain whether the Fed will raise rates in the near term.

"The dollar continues to remain soggy with June priced out and chances that the Fed will move in July waning. Investors will need some good payrolls data and signs of inflation picking up, before they are convinced that a rate hike in September is on the cards," said Jane Foley, senior currency strategist at Rabobank.

Earlier this week, Federal Reserve Chair Janet Yellen did not specify whether the Fed will raise rates over the summer months.

That kept pressure on the dollar which had weakened substantially after the U.S. nonfarm payrolls report on Friday showed the slowest job growth in more than five years in May, quashing expectations for a hike during the summer.

"A June U.S. rate hike is now out of the question and the focus is whether the Fed provides any hints of a July hike. There are no major U.S. indicators until the Fed's policy meeting next week, and the dollar is likely to remain bearish until then," said Junichi Ishikawa, forex analyst at IG Securities in Tokyo.

South Korean won, Chinese yuan and Japanese yen notes are seen on U.S. 100 dollar notes in this file photo illustration shot December 15, 2015. REUTERS/Kim Hong-Ji//Illustration/Files

The dollar's weakness saw the euro gain 0.2 percent to $1.1375. It had closed the past two days virtually flat after its 2 percent surge on Friday with investors not very keen to buy the single currency amid worries that the euro zone is likely to struggle if Britain votes to leave the European Union.

Speculation over whether Britain will remain in the EU or not at a referendum on June 23 continued to sway the pound. Sterling was steady at $1.4545 after having gained roughly 0.8 percent on Tuesday after two polls gave a narrow lead to the "Remain" camp.

(Additional reporting by Lisa Twaronite; Editing by Alison Williams)

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