LONDON – The dollar nursed losses on Thursday after posting its biggest loss in five months in the previous session, as investors dialed down expectations on the outlook for U.S. interest rate hikes next year based on minutes from the Federal Reserve’s latest policy meeting.
With Chinese stocks down between 2-3 percent in Asian trade, low yielding currencies such as the Japanese yen and the Swiss Franc remained firmly supported against the greenback as investors shied away from taking positions in a holiday-shortened week.
“While a December U.S. rate hike seems to be baked in the cake, markets are getting concerned about a possible downgrade in expectations in the outlook for rate hikes next year after the latest minutes, which is weighing on the dollar,” said Kit Juckes, a macro strategist at Societe Generale in London.
The minutes, however, also highlighted concern among some of the members over the inflation outlook, with the emphasis placed on economic data in determining the timing of future rate rises.
The dollar edged 0.1 percent lower against a broad trade-weighted basket of currencies on Thursday to 93.15 after falling 0.8 percent in the previous session, its biggest daily percentage fall since June.
Chinese shares took a sharp hit in the Asian session with mainland indexes down between 2-3 percent, exacerbating investor caution and dampening risk appetite.
Trading conditions were thinner than usual on Thursday, with Japanese financial markets shut for a public holiday. U.S. markets will be closed for the Thanksgiving holiday.
“I think it’s pretty conclusive now that as we move into 2018 the Fed is going to be focusing on (low) inflation rather than growth, so this is still the overriding concern,” said Stephen Innes, head of trading in Asia Pacific for Oanda in Singapore.
Reflecting the growing uncertainty about the future outlook for U.S. interest rates, an overnight rally in June futures contracts meant that markets were pricing in a U.S. Fed funds target rate of 1.58 percent by then, implying only 2 more rate hikes, below market consensus.
The euro edged up 0.1 percent to $1.1830, nearing a one-month high of $1.1862 set last week.