Dollar braces for inflation test after worst week since June

A rough stretch for the dollar may be about to get worse. Data due October 15 are forecast to show US consumer prices fell for a second straight month in September. A decline may cast further doubt on Federal Reserve plans to raise interest rates this year and undermine the US currency, which fell the most in four months this week, paring a 2015 advance.

Spurring the losses, minutes from the Fed's latest meeting showed policy makers discussing the damping effect of dollar strength on inflation and exports, while repeating their intention to lift the overnight target.

"Investors have kind of disregarded the jawboning from the Fed and the rhetoric from the Fed and are really looking at the data," said Chris Gaffney, president at EverBank World Markets in St. Louis. They're concluding that "they're not going to raise by the end of the year, unless we really see a change in the inflation data."

The Bloomberg Dollar Spot Index, which tracks the US currency versus 10 major peers, lost 1.4 per cent since October 2, the steepest tumble since the week ended June 12. It's still up 5.4 per cent this year.

Hedge funds and other money managers cut net bullish bets on the dollar to the lowest in more than a year, according to data from the Commodity Futures Trading Commission. Long positions, or wagers the currency will rise, outnumbered short bets by 196,975 contracts in the week to October 6, the lowest since September 2014.

The 2015 rally has stalled as investors push out bets on a Fed interest-rate increase following the central bank's September decision to hold its target near zero amid market volatility. The dollar slumped versus 15 of 16 major peers this week as members of the Fed's policy-setting committee flagged concern that the currency's strength could hurt the economy. An appreciating dollar makes US products more expensive abroad and damps inflation by making imports less costly.

Consumer prices probably fell 0.2 per cent in September from a month earlier and 0.1 per cent from a year earlier, according to the median forecast in a Bloomberg survey. The Fed targets inflation of about 2 per cent.