Dollar Tumbles on More Interest Rate Uncertainty

        By James Ramage
        The dollar tumbled toward its biggest one-day decline against the euro in more than a month, as a lackluster reading on U.S. growth sowed more doubts about the prospect of higher interest rates this year.
        But the selloff was mitigated by a statement from the Federal Reserve, which attributed some of the recent softness in the U.S. economy to "transitory factors."
        The greenback's broad slide on Wednesday--an acceleration of recent weakness--sent ripples through financial markets. The dollar's fall has been stoked by a flurry of disappointing U.S. economic indicators and stands in contrast to a sharp rally that took the buck to a 12-year high, by some measures, just last month.
        The reversal reflects investors' heightened uncertainty about the timing of any interest-rate increase by the Fed. At the start of 2015, many investors and economists had pegged higher rates by midyear. Now, expectations for an increase have been pushed out to late 2015 and beyond. Higher rates make a currency more attractive for investors.
        "The latest data provided affirmation to investors' fears that there'd be a long wait before they'd get satisfaction from Fed tightening," said Alan Ruskin, global head of developed-market currency strategy at Deutsche Bank. The Commerce Department on Wednesday said U.S. gross domestic product grew at an annualize rate of 0.2% in the first quarter, down from a rate of 2.2% in the fourth quarter and 5% in the fourth quarter.
        Economists estimated GDP to grow by 1% in the first quarter.
        The sharp fall in the dollar illustrates the risks of one-way bets that have dominated financial markets in recent months. On Wednesday, it buoyed commodity markets, sending the U.S. benchmark crude-oil price to its highest level since December. The euro's relative strength knocked European stock markets, which had surged recently in anticipation of the benefits afforded by a weaker euro. That, in turn, put downward pressure on U.S. stocks.
        The driving force behind Wednesday's selling were so-called macro hedge funds and large asset managers that prefer to make wagers on events that are likely to occur within six months, Mr. Ruskin said. Also lightening dollar exposure were longer-term investors booking profits from the extended rally.
        The dollar fell as much as 1.9% against the euro, to $1.1188, during intraday trading, the lowest level since March 3. In late New York trading, one euro recently bought $1.1126, up from $1.0983 late Tuesday.
        After the GDP report was released, A.G. Bisset Associates LLC, which oversees $85 million in individually managed accounts for institutional investors, boosted bets that the dollar would weaken against the euro. The asset manager's currency strategies, which are based on trading trends, forecast that the euro will rise to as high as $1.20, said Chief Executive Ulf Lindahl.
        After the euro's steep decline, driven largely by the European Central Bank's aggressive monetary stimulus, there were simply too many investors with the same bearish bet on the common currency, Mr. Lindahl said. "So we thought a reversion in the other direction was a high probability."
        To be sure, the statement released by the Fed after its policymaking meeting offered dollar bulls some hope.
        The Fed said the economic slowdown during the winter months reflected "transitory factors." The central bank also said it expected that growth would resume at a moderate pace and that inflation would rise gradually toward its 2% target.
        "This statement comes in more optimistic than expected, which is positive for the dollar, given its recent moves," said Ian Gordon, currency strategist at Bank of America Merrill Lynch. "But the Fed will need to see a pickup in U.S. data to remain optimistic on their medium-term growth outlook."
        Economists attributed the disappointing growth number to an unusually strong winter, disruptions at West Coast ports and the effect of the stronger dollar on exports. Many investors and currency strategists expect the dollar to resume its ascent in the second quarter as the economy rebounds.
        Tim Rudderow, chief investment officer at Newtown, Penn.-based investment manager Mount Lucas Management, which oversees $1.8 billion, used the recent weakness in the U.S. currency to add to his bets that the dollar would gain against the euro.
        "My faith in the outlook for the dollar and the U.S. economy is intact," Mr. Rudderow said.
        Still, many investors believe a rate increase in 2016 is becoming more likely. The GDP reading follows a recent raft of soft indicators, including those for retail sales, business investment and manufacturing output.
        Economic data will have to show sustained improvement for the Fed to raise rates, market watchers say. The Fed has pinned rates near zero since December 2008 to help the economy recover from the financial crisis and recession.
        Trading in fed-funds futures, which are used to bet on Fed policies, indicate that investors see a 74% chance of higher interest rates in January 2016, compared with 61% in December, according to CME Group.
        For the October 2015 meeting, investors see odds of 46%. For the next meeting, in June, investors see no chance.
        In 2014 and early 2015, the dollar's strength had been powered mostly by the anticipation of the ECB's bond-buying program, which was announced in January and implemented last month.
        Dollar bulls had expected the Fed to pick up the torch, sending clear signals about higher rates amid faster U.S. growth.
        "That appears to have fallen by the wayside," said Mr. Ruskin of Deutsche Bank.
        Write to James Ramage at James.Ramage@wsj.com
        (END) Dow Jones Newswires

        April 29, 2015 17:14 ET (21:14 GMT)

#FX
#Forex
#DollarTumbles
#DollarWeak
#DollarStrong
#FedDecision
#FedRates
#InterestRate
#Uncertainty