US dollar falls after weak GDP

US dollar falls after weak GDP
# 29 July 2016 17:10 (UTC +04:00)

Baku – APA-Economics. The dollar fell broadly Friday after weak U.S. economic growth data added to doubts about the prospect of U.S. interest-rate increases this year, The Wall Street Journal reported.

The WSJ Dollar Index, which measures the greenback against a basket of 16 currencies, fell 1% to 86.75. The dollar fell against both emerging-market currencies and major peers, notching its biggest decline against the Japanese yen after the Bank of Japan’s latest monetary easing package fell short of investor expectations. The dollar declined 2.5% to ¥102.64.

A Commerce Department report Friday showed that the U.S. economy grew at a seasonally adjusted annual rate of 1.2% in the second quarter, well below the 2.6% growth economists surveyed by The Wall Street Journal had forecast.

The lackluster growth has added to doubts that the U.S. economy is strong enough to handle a U.S. rate increase this year. The report comes after the Federal Reserve left rates unchanged at its meeting Wednesday.

Fed-funds futures, a popular tool for investors and traders to place bets on the Fed’s policy outlook, indicated on Friday that investors assign a likelihood of 12% to a rate increase by the September meeting, down from 18% a day ago, according to CME Group.

Higher rates tend to boost the value of the dollar by making it more attractive to investors seeking yield. But a stronger dollar can also harm U.S. multinationals by making exports less attractive globally. It can also weigh on the rest of the world by making dollar-denominated debt more expensive to pay back.

Shahab Jalinoos, head of FX strategy at Credit Suisse, says the GDP report raises questions about “the Fed’s capacity to tolerate dollar strength.”

“The market in the past couple of weeks had been reanimated by the idea of the divergence trade,” said Mr. Jalinoos, referring to investors who bought the dollar expecting U.S. policy to tighten while other countries eased. “That has been dealt a big blow.”

Meanwhile, the yen rose sharply after the Bank of Japan’s latest monetary stimulus package underwhelmed investors. The central bank said it would boost its purchases of exchange-traded funds, but left interest rates and bond purchases unchanged.

The BOJ is now looking toward September, when it will complete a “comprehensive assessment” on the effects of its easing programs and what to do next.