Dollar extends drop on outlook for Fed, ECB policy

NEW YORK (Reuters) - The U.S. dollar hit a more than 2-1/2-year low against a basket of major rivals on Friday on reduced expectations for another Federal Reserve rate increase this year, while the euro hit multi-year highs in the wake of a European Central Bank meeting.

New York Fed President William Dudley, while saying in a speech Thursday that the central bank should continue gradually raising U.S. interest rates, sounded slightly less confident than in his previous hawkish comments.

The tone reduced demand for the dollar and helped knock the greenback to a roughly 10-month low against the yen to 107.33 yen. Concerns over the impending short-term impact of Hurricane Irma on the U.S. economy also weighed on the dollar, analysts said.

The dollar was last set to drop 2.2 percent against the yen for the week to mark its biggest weekly percentage decline in about 13 months.

“What everybody is trying to do is price out any potential Fed hike for the remainder of this year,” said Dean Popplewell, chief currency strategist at Oanda in Toronto.

The dollar index, which measures the greenback against a basket of six major rivals, hit its lowest level since January 2015 of 91.011 and was set for its biggest weekly decline since late June of 1.6 percent.

The euro rose as much as 0.6 percent to its highest since January 2015 of $1.2092. While the euro pared most of its gains, leaving it roughly flat against the dollar at $1.2027, it was on track for a weekly gain of 1.4 percent, putting it up more than 14 percent this year against the dollar.

ECB President Mario Draghi’s comments Thursday did little to deter euro bulls, and a Reuters report that central bank officials were in broad agreement that their next step would be to reduce their bond purchases also supported the currency.

The ECB “left the mystery out there” with regard to tapering, said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. “It creates a feeding frenzy, and the momentum that was there (in the euro) gets accelerated.”

The dollar was last up 0.2 percent against the offshore Chinese yuan at 6.4990 yuan, rebounding off a low of 6.4437 after sources said the country’s central bank plans to scrap reserve requirements for financial institutions settling foreign exchange forward yuan positions with effect from Monday.

Reporting by Sam Forgione; editing by Grant McCool and Chizu Nomiyama