Dollar falters on bets Fed will pause U.S. rate hikes

NEW YORK (Reuters) - The dollar fell on Monday, pressured by growing expectations the U.S. Federal Reserve will either pause or halt its interest rate hike cycle, with the euro and Swiss franc leading gains among its rivals.

FILE PHOTO: A trader shows U.S. dollar notes at a currency exchange booth in Peshawar, Pakistan December 3, 2018. REUTERS/Fayaz Aziz

Even after last week’s strong U.S. jobs data for December, market watchers believe the world’s biggest economy is losing momentum. Recent comments by Fed Chairman Jerome Powell have added to expectations the central bank may adopt a more cautious outlook.

On Friday, Powell told the American Economic Association the Fed is not on a preset path of rate hikes and it will be sensitive to the downside risks markets are pricing in.

In afternoon trading, the dollar index was down 0.4 percent at 95.736, not far from a 2-1/2-month low of 95.68 hit last week.

“This is just the re-pricing of U.S. rate hikes going forward. That has been the story for a couple of weeks,” said John Doyle, director of markets, at Tempus Consulting in Washington.

Atlanta Fed President Raphael Bostic, who is not a voting member of the Federal Open market Committee this year, added to the Fed’s dovish tone. He said on Monday the Fed may only need to raise interest rates once in 2019, citing business executives’ nervousness about the economy and a global slowdown as factors that may hold the U.S. central bank back.

Shaun Osborne, chief FX strategist at Scotiabank in Toronto noted that fed funds futures continue to price in the small risk of a rate cut over the coming year, with roughly eight basis points of easing implied in the January 2019-January 2020 spread early on Monday.

The Fed raised rates four times in 2018.

Waning expectations of a U.S. rate hike boosted the euro, which rose 0.7 percent to $1.1475. The Swiss franc also gained sharply versus the dollar, which fell 0.7 percent to 0.9799 franc.

The dollar outperformed other currencies in 2018 as the Fed carried on tightening rates. But if it stays on hold in 2019, other currencies such as the euro might benefit.

The FX options market is showing euro risk reversals - a gauge of calls to puts and a market sentiment currency barometer - have steadily climbed to their highest level in more than six months as investors bet on more upside for the single currency.

Financial markets are also optimistic about a meeting of U.S. officials and their counterparts in Beijing this week, the first face-to-face talks since U.S. President Donald Trump and Chinese President Xi Jinping agreed on Dec. 1 to a 90-day truce in their trade war.

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Reporting by Gertrude Chavez-Dreyfuss; Editing by Paul Simao and Chizu Nomiyama