August 20, 2015 / 12:51 AM / 4 years ago

Dollar weakens on receding U.S. rate hike hopes, euro gains

NEW YORK (Reuters) - The dollar fell against the euro and other major currencies on Thursday as bets dwindled that the Federal Reserve next month will raise U.S. interest rates for the first time in nearly a decade.

File illustration picture of Norwegian banknotes and coins of different denominations, taken in Trondheim October 31, 2008. REUTERS/SCANPIX Gorm Kallestad

The euro EUR= rose the most among major currencies, gaining more than 1 percent against the dollar to top $1.12, because of turmoil in emerging market currencies touched off by China's yuan devaluation last week.

Traders said the probability of a September increase by the Fed is now around 40 percent, with many investors exiting dollar positions after Wednesday’s release of minutes from a Fed policymakers meeting contained nothing definitive about the timing of a rate increase. That was down from a probability of about 50 percent at the end of July.

Short-term U.S. interest rates in the over-the-counter market on Thursday suggested traders now see just a one-in-three chance of a September rate increase, down from 48 percent a week ago.

“Many were disappointed that the Fed remained decidedly noncommittal (in the minutes) but we think the door to a September hike remains wide open,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

U.S. jobless claims data on Thursday showed that the underlying strength of America’s labor market and economy allow for a rate increase, Esiner said.

“These are data to put into the column that argues for a September rate hike by the Fed,” he said.

The dollar index .DXY was last off 0.35 percent, while the dollar was down 0.30 percent against the yen JPY= at 123.42 yen and the British pound GBP= was off 0.05 percent against the dollar at $1.5670.

The euro touched $1.1220, its best showing against the dollar since June 30, and was last up 0.75 percent at $1.1194.

The euro has become a favored funding currency for emerging markets investors and others borrowing in currencies with relatively low interest rates and was gaining from those investors exiting risk assets, according to Esiner.

“The euro is poised to benefit from continued global volatility,” Esiner said.

Emerging markets took a fresh battering as Turkey’s lira plunged to a record low. Concerns about fast-falling oil and commodity prices were aggravated by turmoil in the Chinese markets.

The Norwegian crown fell to its lowest in more than seven months against the euro EURNOK=D4 after Norway’s economy slowed in the second quarter, leaving the door open for more monetary easing in coming months.

Reporting By Michael Connor in New York; Editing by Meredith Mazzilli and Steve Orlofsky

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