Dollar Unwind Accelerates as Fed Winds Back Rate-Rise Forecasts

The dollar held near its lowest level since October after suffering its biggest plunge in more than a month on Wednesday as the Federal Reserve scaled back expectations for the path of interest-rate increases in 2016.

The U.S. currency failed to recoup losses that pushed it down against most major peers in New York as the central bank cited the potential impact from weaker global growth and financial-market turmoil on the U.S. economy. The Australian dollar extended gains after the nation’s jobless rate fell and the Reserve Bank’s assistant governor said most monetary authorities want lower currencies. New Zealand’s dollar climbed after the country’s economic growth beat forecasts.

“Currency reaction suggests market expectations for the Fed’s rate outlook were slightly more bullish,” Hiroshi Kurihara, chief U.S. economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “The dollar’s been sluggish despite some positive signs over growth, hinting that it’s sensitive to negative news and that its advance may not be strong even as a rate hike approaches.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 peers, was little changed at 1,195.83 as of 10:02 a.m. in Tokyo from Wednesday, when it slid 1.1 percent for its biggest drop since Feb. 3. It has weakened almost 3 percent this year, paring a 9 percent gain in 2015 and an 11 percent rally the year before.

The dollar rose 0.1 percent to 112.69 yen and gained 0.1 percent to $1.1216 per euro.

U.S. policy makers are weighing when to hike again after raising rates in December for the first time in almost a decade. Patchy growth in the U.S. and a slowdown in China roiled markets in the first few weeks of the year reduced chances for a rate increase in the near term. Officials updated their median year-end interest rate forecast to 0.875, implying two quarter-point increases in 2016, down from four forecast in December.

The inclusion of reference to global economic and financial developments “implies that the Fed is adopting a more cautious approach to policy tightening in light risks related to weaker global growth and potential for a return to more volatile global asset markets,” Greg Gibbs, director of Amplifying Global FX Capital in Breckenridge, Colorado, wrote in a note to clients.

--With assistance from Mika Otsuka To contact the reporter on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Naoto Hosoda, Tomoko Yamazaki

By: Chikako Mogi

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