Dovish Fed talk sends dollar lower, euro recovers

The US dollar dropped on Friday after San Francisco Federal Reserve Bank President Mary Daly suggested the central bank may hold off on raising interest rates in 2019, bolstering risk appetite in the currency market. The Fed probably will not need to raise rates this year, given a slowdown in economic growth and muted inflation, Daly told the Wall Street Journal in an interview published on Friday.
"If the economy evolves as I just said I expect it to - 2 percent growth, 1.9 percent inflation, no sense that (price pressures are) going up, no sense that we have any acceleration - then I think the case for a rate increase isn't there" this year, the paper quoted Daly as saying.
The dollar index, which measures the currency against a basket of six rivals, was about 0.1 percent lower at 96.901, after a week that included several weak data reports, including dismal US retail sales.
"All of this looks like a positive risk tone in markets on dovish Fed comments from Daly which go further than what other Fed speakers have said," said Richard Franulovich, senior currency strategist at Westpac Banking Corp. "That I think is what has undermined the dollar and pulled the euro up."
The fall in the dollar drove the euro up from a three-month low hit earlier in the day, erasing all of its earlier losses, approaching the end of the day 0.05 percent stronger against the dollar at $1.129. "The dollar was bid this morning and Europe touched three-month lows," said Franulovich. "But all that is in the past now."
The euro fell Friday morning after Benoit Coeure, a member of the European Central Bank's executive board, said a new round of cheap multi-year loans to banks was possible. Coeure added that the euro zone's recent economic slowdown is more pronounced than earlier expected, suggesting the path of inflation will also be more shallow.
In spite of some recovery on Friday, the currency was nevertheless headed for a second week of losses and was down 1.77 percent year to date. The results of a meeting on Friday between US Treasury Secretary Steve Mnuchin and Chinese President Xi Jinping is also in focus for foreign exchange investors.