Dollar outlook dims after Fed projects lower interest-rate path

When Federal Reserve policy makers reduced their outlook for the path of interest rates they may have also lowered the trajectory for the dollar.

The US currency fell for a third week against the euro and reached a seven-month low against the British pound before economic reports next week that are forecast to show halting growth. Futures prices show reduced odds of a central bank interest-rate increase by September, damping demand for dollar- denominated assets.

"The tone of the Fed took a lot of people by surprise," Lennon Sweeting, a Toronto-based dealer at the broker and payment provider USForex Inc, said by phone. "The Fed isn't taking much of an aggressive stance. The dollar sold off, a lot of people are trying to play catch-up because of that."

The US currency slumped 0.8 per cent to $1.1352 per euro this week in New York and dropped 0.6 per cent to 122.71 yen. It reached $1.5930 per pound, the lowest level since November 12.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 of its major peers, fell 0.8 per cent to 1,166.76.

Hedge funds and other money managers cut bullish bets on the dollar versus eight major peers for the first time in four weeks, according to data from the Commodity Futures Trading Commission.

Fed officials at a June 16-17 policy meeting cut their median estimate for the federal funds rate for the end of 2016 to 1.625 per cent, compared with 1.875 per cent in March, and also lowered their 2017 outlook. The central bank has kept its rate target at virtually zero since December 2008 to bolster the economy.

The chances for the Fed to increase its rate target at its September meeting were 32 per cent Friday, down from 50 per cent before the Fed policy announcement, according to futures data compiled by Bloomberg.

"You should expect volatility until that first rate hike actually happens," said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California.

A report June 18 showed US core inflation slowed in May while the overall consumer price index was unchanged for the past 12 months, falling short of the Fed's 2 per cent target. Reports this week are projected to show factory orders for durable goods declined in May and consumer sentiment for June is unchanged.

The dollar has fallen 3.6 per cent in the past three months, according to a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Even still, it's the best performer in the past year, rising 17 per cent.

The dollar will probably trade in a range and then climb when the Fed eventually raises rates, Scott Smith, senior market analyst at Cambridge Global Payments, a global foreign-exchange and payments provider, said from Calgary.

"The bias is for a gradual appreciation as the Fed begins to tighten and normalise monetary policy, but it's susceptible to some air pockets," he said.