Dollar ‘vulnerable’ as traders see Fed hike pushed off into 2017

A gauge of the dollar held close to its weakest level in a month after traders pushed expectations for a Federal Reserve interest-rate increase out to at least mid-2017.

The Bloomberg Dollar Spot Index was little changed after sliding 1.7 percent last week, its biggest drop since April, on data showing second-quarter U.S. gross domestic product expanded at less than half the rate economists had forecast. Morgan Stanley warned the worst is still to come for the greenback as the economy deteriorates further.

“The GDP numbers were a disappointment,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The markets are trying to get a handle on the Fed, on whether or not it will hike interest rates this year or whether or not it will have enough excuses to delay. So the dollar is looking vulnerable on that front.”

The Bloomberg dollar gauge rose 0.2 percent as of 10:09 a.m. New York time, after touching its lowest level since July 1. The U.S. currency was little changed at $1.1166 per euro. It rose 0.3 percent to 102.34 yen, after tumbling 3.1 percent in the previous session.

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“Dollar-yen is rebounding after being sold off too aggressively,” said Takuya Kanda, a senior researcher at Gaitame.com Research Institute Ltd. Should U.S. economic data weaken to the point that a Fed rate increase next month is impossible, the dollar versus yen may break 100 this week.

The Bank of Japan said Friday it will almost double its annual exchange-traded fund purchases, while leaving bond buying and its negative deposit rate unchanged. Prime Minister Shinzo Abe is due to unveil a 28 trillion yen fiscal stimulus package Tuesday. That plan will now shoulder the main burden of stoking expectations for growth and inflation.

Futures signal less than a 40 percent likelihood of higher U.S. rates by year-end. That’s down from a 49 percent probability on July 26. The first month where traders see better-than-even odds for an increase has been pushed to June 2017, from February on July 26.

Investors are underestimating how many times the U.S. central bank will raise rates this year and next, but they are probably right about the pace being slower than previously thought, New York Fed President William Dudley said.

“It is premature to rule out further monetary policy tightening this year,” he said in remarks prepared for a speech Monday at a conference in Bali.

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