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Currency Trading: Political Currents Pull Dollar Under -- WSJ

1 Apr 2017 6:32 am
By Chelsey Dulaney 

The dollar slid nearly 3% in the first three months of the year as investors unwound bets that the Trump administration's economic proposals would boost the U.S. economy.

The WSJ Dollar Index, which measures the U.S. currency against 16 others, declined 2.8% in the first quarter, its biggest quarterly decline in a year. The dollar fell 4.8% against the Japanese yen and 1.3% against the euro.

The dollar began the year at a 14-year-high as investors hoped U.S. President Donald Trump's economic plans would bolster U.S. growth and allow the Federal Reserve to tighten policy more aggressively.

But investors have grown cautious on the U.S. currency in recent months amid uncertainties surrounding the administration's ability to push through its tax-overhaul and fiscal-stimulus plans.

"Currency markets are becoming a little more realistic about what is going to be accomplished in terms of the agenda," said Mazen Issa, senior FX strategist at TD Securities. "They're growing used to the fact that there's more bark than bite."

For now, investors are focusing on the outlook for higher U.S. interest rates. Strong data is bolstering the Fed's case for raising rates multiple times this year, analysts say. But investors say they are likely to remain cautious on interest-rate bets because the next "live" meeting is likely months away.

Fed-funds futures, used by investors to wager on the Fed's interest-rate policy outlook, show a 62.5% chance that the Fed raises rates at its June meeting. Markets are pricing in a 58% chance that the Fed raises rates two or more times throughout the rest of the year, according to CME Group data. Higher rates typically support the dollar by making U.S. assets more attractive to yield-seeking investors.

"The takeaway from the Fed speak this week is that while there are some calls for three to four hikes this year, there is limited upside to trigger a sharp move higher in U.S. real rates with June some ways away, " TD Securities analysts said in a research note.

The Fed's preferred inflation gauge, the personal-consumption expenditures price index, rose 2.1% from a year earlier in February, the first time inflation exceeded the central bank's target in nearly five years. Friday's report also showed consumer spending rose a seasonally adjusted 0.1% in February, while economists surveyed by The Wall Street Journal had expected 0.2% gain in spending.

Several Fed officials have also indicated this week that U.S. interest-rates are set to rise multiple times this year.

Federal Reserve Bank of New York President William Dudley said in a television interview that two more rate increases this year "seems reasonable" based on current economic conditions. San Francisco Fed President John Williams said Wednesday he still expects two more rate moves this year, but added, "given my forecast, along with upside risks, I would not rule out more than three increases total for this year."

Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com

(END) Dow Jones Newswires

April 01, 2017 02:32 ET (06:32 GMT)

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