July 27, 2017 / 12:51 AM / 4 months ago

Dollar licks its wounds at 13-month low after Fed seen as dovish

TOKYO (Reuters) - The dollar licked its wounds at 13-month lows against a basket of currencies on Thursday after the U.S. Federal Reserve’s policy statement was perceived to be slightly on the dovish side.

A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

While the Fed said it expected to start shrinking its massive holdings of bonds “relatively soon”, a phrase that was taken by many to mean an announcement in September, the central bank also noted weakness in inflation more explicitly than before.

The dollar’s index against a basket of six major currencies .DXY =USD slumped to 93.44, having fallen 10 percent from its 14-year high of 103.82 set on Jan 3.

The next support levels are seen at 93.019, its June 2016 low, and 91.919, a 16-month low touched in May 2016, though break of these would be seen as major bearish signals.

Although the dollar had been supported by the Fed’s gradual policy tightening since late 2015, its perceived interest rate advantage is eroding as many other central banks have started to look to wind back their stimulus in recent months.

Since European Central Bank President Mario Draghi signalled in June that the central bank could tweak its asset purchase, investors have been flocking to the euro.

The euro EUR= rose to as high as $1.1750 in early Thursday trade, hitting its highest level since January 2015.

The Canadian dollar CAD=D4, which has been helped by the Bank of Canada’s rate hike earlier this month, hit a two-year high of C$1.2415 to the U.S. dollar on Wednesday and last stood at C$1.2447.

The British pound GBP=D4 fetched $1.3119, near its recent peak of $1.3126 while The Australian dollar AUD=D4 reclaimed the $0.80 mark for the first time since 2015 and last stood at $0.8001.

The dollar also slipped to 111.11 yen JPY=, edging near 110.625, its 5 1/2-week low touched on Monday.

Fed policy makers have said another interest rate hike is likely by the end of year but the Fed’s dovish comments prompted investors to slightly reduce expectations of a rate hike.

Fed funds rate futures are pricing in slightly less than a 50 percent chance of a rate hike by December, compared to a little over 50 percent before the Fed’s meeting.

“Even though the U.S. economy is strong, inflation is weak. Markets want to see more signs of inflation before they are convinced about future rate hikes,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

“I also suspect people want to take stock of the impact of the likely reduction of the Fed’s balance sheet,” she added.

Reporting by Hideyuki Sano; Editing by Eric Meijer

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