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US dollar plunges most in 2 months as weak GDP signals Fed on hold

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The US dollar tumbled the most in almost two months after a report showed US economic growth fell short of expectations in the second quarter, damping speculation the Federal Reserve will raise interest rates this year.

[NEW YORK] The US dollar tumbled the most in almost two months after a report showed US economic growth fell short of expectations in the second quarter, damping speculation the Federal Reserve will raise interest rates this year.

The greenback fell against all 16 major currencies tracked by Bloomberg after the Commerce Department said gross domestic produce rose at a 1.2 per cent annualised rate in the April-June period, less than half the 2.5 per US cents median forecast of economists surveyed by Bloomberg.

Fed officials said after their policy meeting this week that "economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."

The US dollar had been strengthening this month as traders boosted bets that the Fed would raise rates in the coming months after stronger-than-expected data on jobs, retail sales and industrial production.

They'll now turn their attention to non-farm payrolls data set to be released Aug 5 for clues on the pace of Fed tightening. The drop in the US dollar Friday came after less-aggressive-than-expected monetary stimulus measures from the Bank of Japan sent the yen surging.

"GDP growth is not weak enough to cause panic, but weak enough for the Fed not to hike," said Arnab Nilim, a money manager at AllianceBernstein LP, which manages US$490 billion in assets.

"If non-farm payrolls are stronger, the dollar can come back. Until then, the dollar will be range bound."

The US dollar dropped 0.9 per cent to US$1.1174 per euro as of 5 pm in New York. It fell 3.1 per cent to 102.06 yen. The Bloomberg Dollar Spot Index tumbled by the most since June 3.

Traders are pricing in a 36 per cent probability that the Fed raises rates by the end of the year, based on the assumption that the effective fed funds rate will trade at the middle of the new Fed target range after the next increase.

That's down from almost 50 per cent on July 26.

Fed policy makers gather three more times this year, with the next meeting set for Sept 20-21.

BLOOMBERG