February 3, 2016 / 12:15 AM / 2 years ago

Dollar tumbles as Dudley comments, U.S. data suggest dovish Fed

Banknotes of Euro, Hong Kong dollar, U.S. dollar, Japanese yen, GB pound and Chinese 100 yuan are seen in this picture illustration, in Beijing, China, January 21, 2016.Jason Lee

NEW YORK (Reuters) - The dollar hit its lowest level against the euro since last October and wiped out recent gains against the Japanese yen on Wednesday on growing expectations for a slower pace of Federal Reserve rate hikes this year.

The euro rose over 2 percent against the dollar to hit $1.11455, its highest level since Oct. 22, while the greenback fell over 2 percent against the yen to a nearly two-week low of 117.055 yen, erasing Friday's gains against the currency notched after the Bank of Japan shifted to negative rates.

The euro was on track to mark its biggest single-day percentage gain since Dec. 3, when a smaller-than-expected stimulus move from the European Central Bank squeezed short bets against the euro and forced a rapid repurchase of the currency. The dollar's decline against the yen was set to be the biggest since Aug. 24.

Analysts said the dollar was weighed down by comments from New York Fed President William Dudley, who told MNI that financial conditions have tightened considerably in the weeks since the U.S. central bank raised interest rates and monetary policymakers would have to take that into consideration should that phenomenon persist.

Also on Wednesday, weaker-than-expected data showing the U.S. economy's services sector expanded in January, but at a slower pace than the previous month, also drove expectations that the Fed would be forced to hike rates more slowly.

"There’s limited ability for the Fed to hike more than two times this year," said Jason Leinwand, managing director at derivatives advisory firm Riverside Risk Advisors in New York.

The dollar index .DXY, which measures the greenback against a basket of six major currencies, hit 96.885, its lowest level in three months. The dollar hit 0.99890 franc, its lowest level against the franc in two and a half weeks CHF=EBS.

The euro was last up 1.59 percent against the dollar at $1.10950 EUR=EBS. The dollar was last down 1.73 percent against the yen at 117.875 yen JPY=EBS while the dollar index was last down 1.59 percent at 97.290.

"Dudley’s comments were quite significant for the dollar's weakness today," said Sireen Harajli, currency strategist at Mizuho Bank Ltd in New York.

A surge in oil prices lifted commodity-linked currencies, such as the New Zealand, Canadian and Australian dollars. The New Zealand dollar rose over 2 percent against the greenback to a nearly one-month high of $0.6697 NZD=D4.

Reporting by Sam Forgione,; additional reporting by Anirban Nag in London; editing by G Crosse and Chizu Nomiyama

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