US dollar drops before Fed as Goldman asset sees rally losing steam

[NEW YORK] The US dollar declined from a seven-week high as investors braced for the Federal Reserve policy decision while Goldman Sachs Asset Management said the greenback's rally is set to fizzle.

The US currency weakened against most major peers after a higher-than-expected US inflation report Sept 16 drove the greenback to its highest since July. Goldman Sachs Group Inc's money-management unit said it expects the US central bank to forgo an interest-rate increase this week and tighten policy more gradually than previously expected.

"We continue to expect US dollar weakness versus G-10 and emerging-market currencies," the asset-management firm said in a note to clients dated Sept 16. "We expect no move in September, but anticipate the Fed will signal that a rate hike is still possible this year, while the pace of tightening will be even more shallow and gradual than previous Fed projections."

The US dollar has declined 3.4 per cent this year with Fed policy makers holding off on raising rates as concern over Brexit and global economic growth stayed their hand. The currency has risen and fallen during the past month on mixed economic data and shifts in traders' expectations for a September hike.

The Bloomberg Dollar Spot Index, which tracks the US currency against 10 of its major peers, fell 0.2 per cent as of 5pm New York time, after it reached its highest level since July 29 on Sept 16. The US dollar weakened 0.2 per cent to US$1.1175 per euro and fell 0.4 per cent to 101.93 yen.

Hedge funds and other large speculators cut net bullish futures positions on the US dollar for the week ended Sept 13, according to data from the Commodity Futures Trading Commission. Bets that the US dollar would rise outnumbered bearish positions by 113,195 contracts, down from 119,066 in the previous period.

"What does Yellen say? She's just going to say it's all data dependent, it's going to be the same kind of carbon copy," said Daragh Maher, New York-based head of US currency strategy at HSBC Holdings Plc, in an interview with Bloomberg Television.

"All these elements are just going to make it hard for the hawkish element in the US dollar to gravitate higher."

The US central bank will meet the same day as policy makers from the Bank of Japan, with forecasts for action by analysts ranging widely, complicating the job of currency traders trying to position for the event.

Goldman Sachs, the investment bank, is taking the view that Japan's central bank "will continue to ease at upcoming meetings."

The Wall Street firm cut its three-month forecast for the US dollar to 108 yen from 115 yen, and its 12-month prediction to 115 yen from 125 yen.

"Focus at the BOJ has shifted toward making the existing policy stance sustainable, as opposed to adding stimulus to meet the inflation target," Goldman Sachs analysts led by Robin Brooks wrote in a note dated Sept 18.

"We are not optimistic."

BLOOMBERG