NEW YORK (MarketWatch) — The U.S. dollar fell Wednesday as investors focused on research suggesting that the Federal Reserve lower its 6.5% unemployment-rate threshold for raising short-term interest rates, which would effectively keep those rates near zero for longer than currently expected.
The ICE dollar index DXY -0.02% , which measures the currency against six rivals, dropped to 80.493 from late Tuesday’s 80.709. Likewise, the WSJ Dollar IndexXX:BUXX +0.02% eased to 72.79 from 72.94.
“Even as we approach a period when tapering is likely to begin, the overall core message from the Fed is likely to be that interest rates are on hold for a long time,” said Camilla Sutton, chief foreign-exchange strategist for Scotiabank.
Dollar weakness was evident against its European rivals, with the euroEURUSD +0.05% firming to $1.3519 from $1.3475 late Tuesday in North America. The British pound GBPUSD +0.03% similarly rose to $1.6081 from $1.6047.
“You have to be a pretty weak currency to be weak against the dollar today,” said Citi’s Englander.
The European Central Bank is scheduled to release its monetary-policy decision Thursday. Talk of an interest-rate cut this year was revived after data showed that euro zone annual inflation tumbled below 1% in October, sharply lower than the ECB’s target.
While most market participants aren’t expecting action on Thursday, many expect comments from ECB President Mario Draghi on the strength of the euro. “Draghi will be forced to put the euro strength into the context of price stability, which is their mandate,” said Sutton of Scotiabank.
For a cut to the refinancing rate to be possible in December, Crédit Agricole’s Frederik Ducrozet, a senior economist for the euro zone, said a few conditions must be met in Thursday’s news conference and statement. That includes language referring to a serious discussion about a potential cut, which would remain dependent on data and economic forecasts, a hint of a shift in the balance of risks to price stability, or a mention of risks that could weigh on inflation.
“Obviously if the balance of risks is shifted to the downside as soon as this week, it’s a very clear signal of an imminent rate cut,” Ducrozet said in a note Wednesday.
