US dollar falls on concern about North Korea, Fed rate outlook

[NEW YORK] The US dollar was on course for its biggest daily percentage decline against the safe-haven yen in more than three months on Tuesday on concern about North Korea's largest nuclear test and a Federal Reserve official's comments about low US inflation.

The US dollar fell as much as one per cent against the Japanese currency to 108.65 yen, its lowest since Aug 29 after North Korea conducted its sixth and biggest nuclear test two days ago. The US dollar was last set for its biggest daily drop against the yen since mid-May.

A top North Korean diplomat warned that his country was ready to send "more gift packages" to the United States as world powers struggled for a response to Pyongyang's latest nuclear weapons test.

The US dollar index, which measures the greenback against a basket of six major rivals, fell as much as 0.5 per cent to a session low of 92.183 and was set for its biggest daily percentage decline in eight days.

The US dollar fell as much as 0.4 per cent against the Swiss franc, another safe-haven currency, on the risks surrounding North Korea to a session low of 0.9545 franc.

"It's a more risk-averse picture," said Vassili Serebriakov, FX strategist at Credit Agricole in New York.

"North Korea accounts for most of it."

Federal Reserve Governor Lael Brainard said inflation was "well short" of target, so the Fed should be cautious about raising US interest rates.

Analysts said the comments cast more doubt over the likelihood of another rate hike this year. Brainard, a permanent voting member on the Fed's monetary policy committee, has in the past convinced colleagues to delay tightening.

"Brainard sounded fairly dovish, and talked about inflation tracking lower," said David Gilmore, partner at FX Analytics in Essex, Connecticut.

"That does not sound like someone inclined to vote for a rate hike in December."

The Fed has raised rates twice this year. Investors have since grown skeptical and now give a December rate hike a 27 per cent probability, down from 30 per cent before Brainard spoke.

The euro gained as much as 0.4 per cent to US$1.1939 ahead of a European Central Bank policy meeting. That was still below a more than 2-1/2-year high of US$1.2069 touched last week. The euro gained even as analysts expect ECB policymakers might voice some concerns at the meeting about the euro's strength.

REUTERS