Dollar at 7-week low as investors edgy about Fed policy

LONDON: The dollar fell to a seven-week low against a basket of currencies on Tuesday, with investors cutting favourable bets in the currency on growing nervousness about the Federal Reserve’s message on interest rates later this week.

Investors were also turning less bearish on the euro going into the year end. Traders said many investors were unwinding positions where they have sold the euro to buy higher-yielding but riskier assets or currencies amid jitters in the high-yield corporate debt market in the United States.

A toxic combination of plunging oil prices and the prospect of a US rate rise has caused stress in the junk bond market over the past week, with some high profile funds forced to halt redemptions as yields spreads have ballooned.

The stress has caused some volatility in global stock markets and led some to question whether the Federal Reserve can raise interest rates.

As such, the US currency was vulnerable to any surprise from a two-day meeting ending on Wednesday. The Fed is widely expected to hike interest rates for the first time in almost a decade but has hinted it intends to hike rates gradually, a stance deemed by many as relatively dovish.

“Given all the concerns, there is a risk that the Fed could opt for a dovish rate hike and downgrade the path for future rate increases,” said Yujiro Goto, currency strategist at Nomura. Currently, the Fed’s rate path is signalling at least four hikes over the course of the next year, and any downgrade could weigh on the dollar, Goto added.

The dollar index fell to a low of 97.19 and was last trading at 97.355, down 0.3 percent on the day. The dollar was down 0.2 percent at 120.75 yen, having pulled back from a six-week low of 120.35 on Monday.

The euro was up 0.4 percent at $1.1040, having hit a seven-week high of $1.1060 earlier in the London session.

“Dollar long positions were being liquidated in the market at a faster pace than expected,” said Junichi Ishikawa, market strategist at IG Securities in Tokyo. “It could face additional pressure if US Treasuries are bought back on relief that the Fed’s rate hike cycle will be quite a slow one.”

The Swedish crown rose to a day’s high against both the dollar and the euro after the Riksbank kept rates unchanged. The euro fell 0.5 percent to 9.27 crowns from around 9.34 crowns beforehand.

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