Gradual Fed pace prompts December blues for dollar

The dollar's in a funk.

The US currency is headed for its biggest monthly loss since June after the Federal Reserve raised its target from near zero on December 16 and underscored that it'll proceed gradually with additional interest-rate increases.

The message from the Fed, combined with European Central Bank stimulus measures that were less robust than some investors anticipated, have led dollar bulls to retreat. Large speculators such as hedge funds trimmed futures bets on greenback gains the past three weeks, Commodity Futures Trading Commission data show.

"The expectation is that we're not going to see aggressive tightening and that's really impacting the dollar - that's what we're going to see" going into year-end, said Sireen Harajli, a currency strategist at Mizuho Bank in New York.

The Bloomberg Dollar Spot Index, which tracks the US currency against 10 major peers, has lost 0.9 per cent this month. The greenback is down 3.7 per cent at $1.0971 per euro and 2.3 percent to 120.32 yen as of Friday in Tokyo.

The index had surged about 9 per cent this year through November as investors anticipated that the Fed would tighten policy while counterparts in Europe and Japan carry out unprecedented stimulus.

Yet investors are looking past the Fed's liftoff and contemplating a landscape of low US interest rates for years to come. Traders expect about two Fed rate increases in 2016, futures indicate. That's short of the four boosts that Fed projections indicate.

Hedge funds reduced net futures positions that profit from gains in the dollar versus a basket of eight currencies to 322,224 contracts as of December 15, the smallest in about a month, according to CFTC data.