The dollar headed for its worst month in five years after Federal Reserve Chair Janet Yellen doused speculation the U.S. central bank would pick up the pace of interest-rate increases.
A gauge of the greenback was near the lowest since June after Yellen said the Fed would act “cautiously” as it looks to raise rates against a backdrop of deteriorating global economic growth. Over the past two days, the index pared almost all of the gains made last week, when policy makers including St. Louis Fed President James Bullard and San Francisco Fed President John Williams said a hike as soon as next month was possible. The dollar has declined against all its major peers in March.
“The Yellen effect was quite strong” in weakening the dollar, said Philip Wee, a senior currency economist at DBS Group Holdings Ltd. in Singapore. “She’s emphasizing patience.”
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, was little changed as of 1:39 p.m. in Tokyo Wednesday, after declining 0.8 percent in New York. It has fallen 3.4 percent this month, set for the worst loss since April 2011.
The U.S. currency slid 0.2 percent to 112.46 yen, after dropping 0.7 percent Tuesday. It fell 0.1 percent to $1.1299 per euro, following a 0.8 percent slide.
Global developments — particularly regarding China — pose ongoing risks to the Fed’s outlook, Yellen said in a speech to the Economic Club of New York on Tuesday. Appreciation by the dollar is still expected to weigh on inflation in months to come, she said.
Traders slashed the likelihood of a rate increase in April to zero, down from 6 percent on Monday, and lowered the probability of a hike in June to 28 percent from 38 percent, based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.
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“Yellen indicated that core Fed members take into account the global context more than regional officials,” said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. in New York. “A June rate hike would be difficult as global financial turmoil earlier this year affects the real economy with a time lag.”
Commonwealth Bank of Australia, the country’s largest lender, has revised down its forecasts for the U.S. dollar, while raising those for the Australian dollar, New Zealand dollar, euro and yen.
“The actual U.S. dollar decline has been more dramatic that we expected,” currency strategists led by Richard Grace at Commonwealth Bank in Sydney, wrote in a note to clients. “We have subsequently revised lower the extent to which we believe the Fed will lift interest rates both in the short term and in the long term.”
(Corrects size and scope of dollar low in second paragraph.)
–With assistance from Mika Otsuka and Kevin Buckland To contact the reporters on this story: Chikako Mogi in Tokyo at firstname.lastname@example.org, Lilian Karunungan in Singapore at email@example.com. To contact the editors responsible for this story: Garfield Reynolds at firstname.lastname@example.org, Nicholas Reynolds
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