Dollar slides as investors brace for cautious Fed

Shoaib Ur Rehman December 19, 2018

NEW YORK: The dollar fell across the board on Wednesday, as investors bet the Federal Reserve would signal a slower pace of interest rate hikes next year as it grapples with financial market volatility and potential slowdowns in major economies around the world.

The greenback dropped to a seven-week low against the yen and a roughly one-week trough versus the euro.

The Fed ends its two-day meeting later on Wednesday and is widely expected to raise rates for a fourth time this year but express caution about future monetary tightening due to concerns about slowing global growth.

Expectations of a pause from the Fed amid a US-China trade war and global financial market volatility has led some investors to question if the dollar’s stellar run will continue into 2019.

US President Donald Trump has berated the Fed repeatedly and on Tuesday said in a tweet it was “incredible” for the central bank to even consider tightening given global economic uncertainties.

“We expect the Fed to hike and yet the FX reaction probably hinges on the dots and tone,” said Mark McCormick, North American head of FX strategy, at TD Securities in Toronto.

Fed officials’ median projection on the number of rate increases is commonly referred to as its “dot-plot.”

“For the US dollar, we think the most likely path leans lower, notwithstanding the fact that a Fed pause is priced in. Notably, markets are witnessing, in real time, a narrative shift rather than just a repricing of the Fed’s trajectory,” he added.

According to the CME Group’s FedWatch tool, the probability of a December rate hike is 69 percent, down from around 75 percent last week, a significant move in such a short period.

The safe-haven yen and the Swiss franc both strengthened as Tuesday’s plunge in oil prices provided a stark reminder of dimming prospects for the global economy. US crude futures recovered on Wednesday, but were still in a downtrend since October.

Risk sentiment has been soured by weaker-than-expected economic data out of China and the eurozone.

In mid-morning trading, the dollar was down 0.3 percent against the yen at 112.25 yen, while the euro rose 0.6 percent versus the greenback to $1.1426.

The euro was also supported by news that Italy had struck a deal with the European Commission over its contested 2019 budget, signalling an end to weeks of wrangling that had shaken financial markets.

The dollar also slipped against the Swiss franc, down 0.1 percent at 0.9910 franc.

The US currency’s losses pushed its index 0.5 percent lower at 96.612.

Copyright Reuters, 2018
 

 

 

 

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