US dollar falls to 9-month low as traders look for yield overseas

[NEW YORK] The US dollar slumped to its lowest in more than nine months as speculation that the Federal Reserve won't raise interest rates anytime soon spurred a search for yield outside the US.

The Bloomberg Dollar Spot Index, which tracks the currency versus 10 peers, tumbled to its lowest since June as traders pushed back expectations for a rate increase by year-end. Currencies of commodity exporters, including South Africa's rand, the Brazilian real and the New Zealand dollar, advanced as investors reallocated money to higher-yielding assets.

The Fed is weighing signs of strength in the domestic economy versus slowing growth overseas as policy makers look to raise rates twice this year. Concern that an international slump, particularly in China, will spill over into the US has kept a lid on the central bank's plans and boosted the appeal of assets overseas.

"The market has generally been trying to trade the weakness in the dollar, and to some extent, the recovery in risky assets," said Sebastien Galy, director of foreign exchange at Deutsche Bank AG in New York.

"What we're entering is a period of consolidation in the currency market related to the dollar. Even if we get better data, it will not convince anybody that the Fed is going to shift significantly its policy."

Bloomberg's gauge of the US currency slid 0.4 per cent to 1,174.15 as of 1:14 pm in New York. The greenback slipped 0.1 per cent to US$1.1412 per euro and was little changed at 108.01 yen.

The extra yield on 10-year US government securities relative to the average for the other Group of Seven nations fell to 0.74 percentage point, almost the smallest since February, according to data compiled by Bloomberg.

Scaling Back

Traders see a 49 per cent likelihood of a rate increase in the US before the end of the year, down from 58 per cent a week ago, futures contracts show.

Investors have cut bets on the US dollar in tandem, reducing net wagers on US currency strength versus eight counterparts to 36,304, the least since July 2014, according to data from the CFTC.

A measure of the greenback's momentum, known as the 14-day relative strength indicator, has fallen to 30, the level that some traders view as a signal the currency has reached extreme levels and may reverse.

"For the time being, we remain broadly neutral on the greenback's near-term prospects and we see the current period of consolidative price action as likely to continue this week," Eric Viloria, a strategist at Wells Fargo & Co in New York wrote in a note.

BLOOMBERG