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Dollar near one-year low as Fed rate increase speculation cools

[NEW YORK] The dollar was little changed after a gauge of the currency fellto the lowest level in almost a year amid speculation that the US won't raise interest rates any time soon.

The US currency has lost ground versus most major peers over the past month as traders lowered expectations for a rate increase by the Federal Reserve in June to 12 per cent.

The greenback slumped against Europe's shared currency on Monday for a sixth day, the longest run of losses since September, after a report showed manufacturing in the US expanded less than forecast.

Persistent weakness dragged the dollar down against the euro for a third straight month in April - its longest losing streak since 2013 - amid signs US policy makers aren't convinced the global and domestic economies can withstand higher borrowing costs. The US has posted disappointing growth data even amid nascent signs of recovery in Europe.

"The Fed is completely out of the picture now for the next few weeks - even with the June meeting, there's got to be a lot of doubt about whether the Fed can raise rates," said Shaun Osborne, chief foreign-exchange specialist at Bank of Nova Scotia in Toronto.

"The dollar has just not done particularly well over the past few weeks as the Fed has moved toward delaying rate hikes, and that's a situation that definitely will continue, certainly for the near term."

The Bloomberg Dollar Spot Index, which tracks the US currency versus 10 major counterparts, was at 1,155.94 as of 7:45 am in Singapore on Tuesday, after retreating 0.3 per cent to 1,156.29 on Monday, the lowest closing level since May 15. 

It slumped 2 per cent last week as the Bank of Japan's inaction coincided with Fed Chair Janet Yellen reiterating she's in no rush to cool the US economy by raising borrowing costs.

The euro fell 0.1 per cent to US$1.1526, retracing some of its 0.7 per cent advance in the previous session, when it touched the highest level since Aug. 26.

Australia's dollar declined 0.1 per cent to 76.60 US cents before the nation's central bank meets Tuesday with markets signaling about a 50 per cent chance policy makers will cut the benchmark interest rate from a record low of 2 per cent. Japanese markets are closed from Tuesday through Thursday for public holidays.

Expectations for higher rates in the US have faded since the Fed's meeting last week. Officials downgraded their assessment of economic growth, even as they emphasized improvement in the labor market and reduced overseas headwinds.

US manufacturing expanded at a slower pace than forecast in April as factories continued to grapple with lax global demand and fallout from a weakened energy industry. The Institute for Supply Management's index barely held above the 50 level that indicates stagnation, falling short of the median forecast in a Bloomberg survey of economists, the Tempe, Arizona-based group's report showed Monday.

By contrast, European data on April 29 showed the economy expanded more than analysts predicted in the first quarter and unemployment declined in March to the lowest since 2011. Markit Economics said Monday that its monthly Purchasing Managers Index for the currency bloc expanded at a faster pace than initially estimated.

"The euro zone is looking in a better shape than it has been in," said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. The Fed has not given a strong signal that rates will rise sooner rather than later, so investors are looking alternatives, "and the euro by default is making some modest gains," he said.

The dollar is forecast to strengthen to US$1.10 per euro and 112 yen by mid-year, according to median estimates in Bloomberg surveys of analysts.

Hedge funds and other large speculators extended bets on dollar weakness versus eight major currencies to the most in almost two years.

Positions that benefit from losses by the US currency exceeded those that benefit from a rally by a net 47,035 contracts in the week ended April 26, a report from the Commodity Futures Trading Commission showed.

BLOOMBERG