Dollar slides vs yen on U.S. rate outlook; euro falls

NEW YORK (Reuters) - The dollar fell to two-week lows against the yen on Thursday, pressured by the Federal Reserve’s cautious outlook on the U.S. economy, which suggested that the central bank is near the end of its tightening cycle.

FILE PHOTO: Police officers display counterfeit U.S. dollar bills during a news conference in Lima October 14, 2015. REUTERS/Guadalupe Pardo

The euro slid from three-week highs against the dollar after Jens Weidmann, the Bundesbank president and a member of the European Central Bank Governing Council, painted a bleak picture of the German economy, saying the country’s slump will last longer than initially thought.

In the United States, the Fed’s dovish stance in its policy statement on Wednesday after the close of a two-day meeting took the market by surprise even though the Fed has been preaching patience and balance sheet flexibility for some time. Analysts said the statement seemed as if the Fed did a turnaround from its previous generally upbeat economic stance.

Over the last two months, the dollar index, which tracks the greenback versus six major rivals, has fallen around 1.7 percent, its worst two-month performance in a year.

On Wednesday, the Fed said it would be patient in raising interest rates further this year as it pointed to growing uncertainty about the U.S. economic outlook. It did not rule out using a range of tools, including altering the size and composition of its balance sheet, as well as rate cuts, if the economy warranted it.

Following the Fed statement, TD Securities has now changed its Fed forecast, TD’s senior FX strategist, Mazen Issa, said. It expects the Fed to hike just one more time, instead of twice, and this would be the last for this cycle.

The market is now looking to Friday’s U.S. non-farm payrolls report for January, with economists surveyed by Reuters forecasting job gains of 165,000, down from 312,000 in December.

“Given the renewed weakness for the dollar, if the jobs and wages data were to disappoint expectations badly then this will further reinforce the Fed’s cautious outlook on the economy and reduce the possibility of rate increases even further,” said Fawad Razaqzada, market analyst at in London.

In afternoon trading, the dollar fell 0.2 percent against the yen to 108.81 after earlier falling to a two-week low of 108.51.

The euro was down 0.3 percent against the dollar at $1.1439 EUR=, pressured by comments from the Bundesbank's Weidmann.

Weidmann also said the euro zone is likely to undershoot its inflation projection this year due to lower oil prices and the ECB should look through this dip and not waste time unnecessarily in normalizing policy.

Lee Hardman, strategist at MUFG, said the euro was sold off on the back of Weidmann’s comments, which became more significant given he is one of the more hawkish members of the ECB board.

Amid the euro’s losses, the dollar index rose 0.3 percent to 95.591, recovering from a three-week low.

Graphic: World FX rates in 2019

Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler and Leslie Adler