(Bloomberg) — The dollar dropped after minutes from the Federal Reserve's January meeting showed policy makers argued for keeping interest rates near record lows for longer due to risks facing the economy.
The greenback slid versus a basket of peers as committee members pointed to the strength of the currency, international flash points from Greece to Ukraine, and slow wage growth as weakening the case for the first rate rise since 2006. The dollar gained earlier versus emerging-market counterparts on speculation higher U.S. rates may attract investment away from developing nations to the world's largest economy.
"The markets are focusing on the dovish headlines from the minutes," Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA, said in a phone interview. "It's probably going to be a corrective setback for the dollar, but we don't see this as a major cause to rethink dollar longs." A long is a bet an asset will appreciate in value.
The Bloomberg Dollar Spot Index, a gauge of the currency's performance against 10 major peers, declined 0.1 percent to 1,161.50 as of 3:53 p.m. in New York after rising as much as 0.4 percent.
A Bloomberg index of 20 emerging-markets currencies reversed earlier losses and rose 0.2 percent.
'Longer Time'
"Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time," according to the record of the Jan. 27-28 Federal Open Market Committee meeting released on Wednesday in Washington.
The main lending rate has been in a range of zero to 0.25 percent since 2008.
The dollar has rallied since the FOMC said after its last meeting it "can be patient" as it considers when to raise the benchmark interest rate, even as it described the labor market as "strong." A report the following week showed payrolls rose more than forecast in January to cap the strongest three-month gain in 17 years.
Members of the committee discussed their communication strategy at length.
Market Overreaction
"Many participants regarded dropping the 'patient' language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates," the minutes said. "Some expressed the concern that financial markets might overreact."
Federal fund futures traded on the CME Group Inc. exchange give a 20.7 percent chance the central bank will lift rates at their policy meeting in June, according to Bloomberg data. That is down from 25 percent yesterday.
"The dollar strength is one of the reasons, combined with wage growth, why June may not be the liftoff," Jennifer Vail, head of fixed-income research at U.S. Bank Wealth Management, which manages $ 122 billion in assets. "They're just being very cautious and very balanced about their approach because at this point it's obvious they do not have consensus."
Vail said she still expects an increase in June.
The implied yield on the December 2015 Eurodollar futures contract, which are priced at expiration on the three-month dollar London interbank offered rate and are used to speculate on the future path of the Fed's rate, fell 0.06 percentage points to 0.80 percent after the minutes were reported. The yield on the December fed fund futures contract is at 0.505 percent, down from 0.565 percent yesterday.
To contact the reporters on this story: Lananh Nguyen in New York at lnguyen35@bloomberg.net; Rachel Evans in New York at revans43@bloomberg.net
To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Kenneth Pringle, Greg Storey
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