The dollar weakened slightly against other major currencies on Monday after the Federal Reserve warned about the global growth outlook, compelling traders to reevaluate the pace of future US interest rate increases.
The greenback has been on a strong run this year due to the Fed’s steady policy tightening on the back of a bustling economy and increasing wage pressures. A fourth rate hike for this year is expected next month and the policy makers had hinted on two more by June next year.
However, comments on Friday by Richard Clarida, who is the Fed’s newly appointed vice chair, shook market expectations for a steady pace of tightening. Clarida warned about a slowdown in global growth, saying “that’s something that is going to be relevant” for the outlook for the US economy.
Federal Reserve Bank of Dallas President Robert Kaplan, during a separate interview, also said he is seeing growth sluggishness in Europe and China.
The comments may give some clues that the Fed is set to slow down its pace of monetary tightening and led some traders to ask whether the dollar’s strength was closing in to its end, with the benchmark US 10-year treasury yields pulling back a bit.
New York Fed President John Williams is set to speak later in the day and traders would be waiting to see if his speech will resonate with the same theme as his colleagues.
“The market has definitely interpreted these statements as dovish. However, the Fed has always remained data dependent and to that extent, this should not come as a surprise,” said Michael McCarthy, who is chief markets strategist at CMC Markets.
The dollar index, which tracks the dollar’s strength against the value of six other major currencies, traded slightly lower at 96.45, adding to a decline of 0.5 percent on Friday. The dollar index had reached a 16-month high of 97.69 on November 12.
The yen was fetching 112.68 on the dollar, slightly higher on the day. The dollar dropped 0.9 percent against the yen last week as traders flocked the safe-haven Japanese currency on worries over US-China trade tensions and political risks in Europe around Brexit and the Italian budget.
The euro slipped 0.1 percent in Asian trade, trading at $1.1403, having gained over the last four trading sessions despite weaker economic fundamentals.
The single currency has increased 2.7 percent against the pound since November 13 as blurred outlook over a smooth Brexit deal remains at the center.
“Euro has traded almost exclusively on anti-dollar flows and risk appetite and we expect the same this week as the currency looks past nay weakness in Germany’s PPI report or Eurozone PMIs” stated Kathy Lien, who is the managing director of currency strategy at BK Asset Management.
The British pound floundered at $1.2832, having been under heavy selling last week amid the turbulence over Prime Minister Theresa May’s draft Brexit plan.