Dollar Weakens After Fed Statement

By James Ramage 

        The Federal Reserve's signal that it is likely to go slow with any interest-rate increases has reinforced Wall Street's doubts about the dollar.
        After its latest policy-making meeting, the Fed again lowered both its U.S. growth forecast and its interest-rate projections. In a news conference after the meeting, Fed Chairwoman Janet Yellen said the economy wasn't strong enough to handle an increase in the short-term benchmark interest rate, which has been pinned near zero since the depths of the financial crisis in 2008.
        That was the cue for investors to sell the dollar, which tumbled to a one-month low against the euro Wednesday.
        The Fed's downbeat tone on the economy prompted a rethink among some money managers as to when the first rate increase since 2006 would occur. Before the Fed meeting, the widespread consensus was that it would happen in September. Now, some investors aren't quite so sure.
        "People were expecting a stronger commitment by the Fed for a September rate hike," said Putri Pascualy, a portfolio manager at Pacific Alternative Asset Management Co., which oversees more than $9 billion. "The market got a little ahead of itself." The asset manager closed out of its bets on a stronger dollar last month, she said.
        Wednesday's decline was the latest setback for dollar bulls.
        The greenback staged a broad rally last year and at the beginning of 2015 on the belief the Fed would be the first major central bank to raise rates. Higher interest rates draw portfolio managers to investments in that currency, and these flows of money tend to push up its relative value.
        Those flows won't help the dollar as much this year, particularly against the euro, said Roger Hallam, chief investment officer for currencies at J.P. Morgan Asset Management, which oversees $1.8 trillion. "Relative economic growth helped the dollar strengthen during the second half of last year, but that's been a less compelling story this year," he said.
        Softness in the U.S. economy in the first quarter cast a pall on forecasts for the remainder of the year, and economic indicators are sending mixed signals. Meanwhile, the growth outlook in the eurozone has brightened, despite the recent flare-up in the Greek debt crisis, causing investors to grow less bearish on the euro.
        One euro bought $1.1338 on Wednesday, compared with $1.1266 ahead of the Fed meeting and $1.1250 in late New York trading Tuesday.
        The dollar's one-day drop of 0.8% against the euro brings losses since mid-March to 7.4%. On March 13, the dollar hit a 12-year high against the common currency shortly after the European Central Bank started to pump billions of euros into the economy.
        After gyrating in the initial minutes following the release of the Fed statement, the dollar wavered but then took a downward turn for the duration of Ms. Yellen's news conference.
        Ms. Yellen said the Fed wanted to see "more decisive evidence" of sustained growth before lifting rates. While she said the labor market continued to improve, some weakness persists. The Fed has said an improving labor market and a pickup in the pace of inflation are prerequisites for higher rates.
        The Fed lowered forecasts for U.S. growth in 2015 to a range of between 1.8% and 2.0%, from the range of 2.3% to 2.7% they cited in March.
        Despite the recent pullback, the dollar is stronger against many currencies compared with a year ago. Ms. Yellen said the dollar's strength will continue to create headwinds for the economy because it makes exports more expensive. "I think we have seen that it's had a negative effect on net exports and so served as a something of a drag on the economy, and probably that drag is going to continue for some time to come," Ms. Yellen said.
        Fed officials lowered their rate projections for 2016 and 2017 by a quarter of a percentage point. The median expectation for the Fed's short-term rate target at the end of this year still stands at 0.625%, implying two rate increases this year.
        But the Fed acknowledged that the U.S. economy has expanded moderately after a slow first quarter. And 15 of 17 Fed policy makers project the central bank will start increasing rates by the end of the year.
        As well, some investors say the dollar could regain its strength, at least in the short term, if Greek officials and the country's international creditors fail to reach an agreement on Greece's debt.
        Jim Caron, portfolio manager on the global fixed-income team at Morgan Stanley Investment Management, which oversees $406 billion, maintained his prediction for a Fed rate increase in December, as well as his bets that the dollar will strengthen against the euro, yen and Australian and New Zealand dollars.
        But he was surprised somewhat by the Fed's negative take on 2015. "The dollar will react to the more immediate-term view, which is the more dovish side of things," Mr. Caron said. "It's not overly conclusive that we're at a point where the Fed needs to increase rates twice this year."
        Fed-funds futures, which are used to place bets on central-bank policy, showed Wednesday that investors and traders see a 19% likelihood of a rate increase at the September Fed policy meeting, compared with 28% before the statement, according to data from CME Group Inc.
        The odds of a rate increase at the December meeting fell to 56% from 68% before the statement. The odds of a rate increase at the January 2016 meeting rose to 71% from 65% on Tuesday.
        Min Zeng contributed to this article.
        Write to James Ramage at james.ramage@wsj.com
        (END) Dow Jones Newswires

        June 17, 2015 18:52 ET (22:52 GMT)

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