Dollar retraces losses after worst week in three months

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The dollar rebounded on Monday after its poorest weekly performance in three months the previous week, helped by gains against the yen, which pulled back from Friday’s three-week highs after the Bank of Japan eased policy less aggressively than expected.

The dollar shed 2 percent last week against a basket of currencies <.DXY> after the Federal Reserve gave no hint it would raise rates soon, and on disappointing U.S. growth data at the end of the week.

Despite the greenback’s recovery on Monday, it could struggle to gain further traction, analysts said, as financial markets have all but discounted any chance of an interest rate increase this year or next.

Fed funds futures rates on Monday suggested a 34 percent probability the U.S. central bank will raise rates at its December meeting, down from about 48 percent two weeks previously, according to CME Group’s FedWatch.

Christopher Vecchio, currency analyst at DailyFX, said the market has no confidence the Fed will increase rates until at least January 2018, a time frame in which the chances of a rate increase is seen eclipsing the 60 percent threshold.

“The stark reality for Fed policymakers is that the U.S. economy (+1.2 percent annualized) is growing slower than the euro zone economy (+1.6 percent annualized),” said Vecchio.

“Against this backdrop, it seems highly unlikely the Fed would be in a hurry to raise rates.”

The dollar gave back some of Monday’s gains after data showed that the U.S. manufacturing sector expanded in July at a slower pace than in the previous month.

In late trading, the dollar index rose 0.2 percent to 95.755.

New York Fed President William Dudley said at a central bankers’ conference in Bali on Monday that the Fed might raise rates before the November U.S. election if the economy and labor market improve quickly..

DailyFX’s Vecchio said there is a clear “dissonance” between what the Fed said it might do – raise rates one or two times this year if U.S. data continues to improve – and what markets are expecting.

Against the yen, the dollar rose 0.3 percent to 102.325 , recovering from a three-week low. Some analysts think the yen’s decline was temporary, saying the wave of risk aversion triggered by the BOJ’s under-delivery of stimulus measures would be yen-positive.

Investors are expected to focus this week on a heavy economic calendar, with central bank meetings in Australia and the UK, culminating in Friday’s U.S. non-farm payrolls report.

(Editing by Steve Orlofsky)