The US Federal Reserve should be cautious on interest rate increases due to lingering risks to the US economy, one of its most influential policy makers said on Monday, appearing to signal that the chance of a hike by the end of the year was fading.
Advertisement
The U.S. Commerce Department reported earlier Friday that the economy expanded at a 1.2 percent annualized pace, less than half the advance projected by economists in a Bloomberg survey. Morgan Stanleywarned the worst is still to come for the greenback as the economy deteriorates further.
“Today’s modest dollar reversal is in response to a bit of an overreaction to last Friday’s GDP release”, said ING currency strategist Viraj Patel, in London.
The Fed last hiked its overnight rate in December after keeping it anchored near zero for seven years. “So the dollar is looking vulnerable on that front”. “Not really in the medium-term – the USA consumer remains pretty resilient and this will continue to be the key driver for the US economy”. Against its Japanese counterpart, the dollar added 0.3 percent to 102.36 yen, after whipsaw trading in Friday’s session in which it ranged from a low of 101.97 to a high of 105.75.
“Dollar-yen is rebounding after being sold off too aggressively”, said Takuya Kanda, a senior researcher at Gaitame.com Research Institute Ltd.
“Consider the many different channels of potential Brexit influence – not only the impact on worldwide trade and global interest rates and currencies, but also on bank equity prices and on political uncertainty”, he said.
Forex traders’ attention will now turn to Tuesday’s speech from Japanese Prime Minister Shinzo Abe, in which he is expected to outline details of the government’s 28 trillion yen stimulus flagged last week. That plan will now shoulder the main burden of stoking expectations for growth and inflation. That is down from a 49 percent probability on July 26.
The U.S. currency has dropped at least 0.4 percent against 16 major peers since Thursday.
Advertisement
Federal Reserve Bank of New York President William Dudley has warned that traders who had been ruling out an interest-rate increase later this year were becoming over-confident, despite the fact that Fed officials have left its short-term rates unchanged.
