US$ retreats as traders question pace of Fed rate increase

London

THE dollar weakened, with the Norwegian and Australian currencies among the biggest gainers, as investors tempered bets that a Federal Reserve interest-rate increase in December will fuel a further advance in the greenback.

The US currency has struggled to extend gains that pushed it at least 1 per cent higher against all of its 10 developed-nation counterparts this month. The probability that the Fed will raise rates by next month was 66 per cent, compared with 50 per cent at the end of October, after a Labor Department report last week showing the biggest increase in jobs this year backed the case for the Fed to act next month.

"The risk is they could deliver a rate hike in a very dovish way and indicate they could be on hold for a while afterwards," said Jane Foley, senior foreign-exchange strategist at Rabobank International in London. "That could be a hurdle for the dollar bulls." The dollar weakened less than 0.1 per cent to US$1.0728 per euro at 6.19 am New York time after appreciating to US$1.0675 on Tuesday, the strongest since April 23. The US currency was little changed at 123.13 yen. The euro was little changed at 132.05 yen.

The US Dollar Index, which tracks the greenback versus major counterparts, dropped 0.2 per cent to 99.119. It touched 99.504 on Tuesday, the highest level since April 14.

The dollar's surge is proving a double-edged sword for US policymakers weighing how far to tighten policy. While it indicates that markets are preparing for the Fed's first rate increase since the financial crisis, the appreciation risks further both damping inflation and damaging the profitability of US companies. Two out of three companies in the Standard & Poor's 500 Index that reported earnings through Oct 22 mentioned the strong dollar or currency-related woes in conference calls with analysts and investors.

"We're priced for that December move," Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London, said in an interview on Bloomberg Television's The Pulse with Manus Cranny.

"The key constituent out of the Fed is what's the statement saying, what does that imply for 2016. I don't necessarily foresee the dollar index puncturing aggressively above the highs of the year," he said.

Norway's kroner appreciated 0.3 per cent to 8.6029 per dollar, having touched 8.7060 on Tuesday, its weakest level since April 2002. The Australian dollar climbed 0.2 per cent to 70.49 US cents.

"Markets are shifting their focus to whether the Fed will suggest successive hikes after December and whether US data remain strong," said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management Co. BLOOMBERG