Dollar tumbles as Fed rate hike expectations diminish on Dudley comments

The dollar was placed under pressure after dovish comments made by New York Fed President Bill Dudley who said in an interview with MNI that global financial conditions have tightened markedly since the Federal Reserve lifted interest rates in December and the central bank will have to take that into account if the situation persists into March.

Mr Dudley said: “We’re acknowledging that things have happened in financial markets and in the flow of the economic data that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward, but it’s a little soon to draw any firm conclusions from what we’ve seen.”

Hi comments ratcheted back expectations of rate rises further, with some economists now expecting the Federal Open Market Committee to keep rates unchanged at the March 15-16 meeting and instead pull the trigger again at the June meeting. But some traders expect no move at all in 2016. Back in December 2015 when the Fed made its first rate hike, the expectations for the number of rate hikes in 2016 were as high as four.

Overnight, the dollar index sank as weak data prompted investors to scale back expectations for near-term Fed rate rises. The gauge, a measure of the US currency versus a basket of global peers, slumped 1.6 per cent – its biggest drop since November 12 – to 97.288 after the Institute for Supply Management’s non-manufacturing index fell to 53.5 in January from 55.8, the lowest level since February 2014.

The euro/dollar surged after Dudley’s comments to breach the key $1.10 level and the pair rallied to a high of $1.1144, a more than three month high. Meanwhile USD/JPY tumbled to 117.04 yen. Just less than a week ago the pair was as high as 121.68.

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