The dollar index whipsawed through the day but ended up little moved on Friday from its late Thursday levels as investors kept positions tight ahead of Monday's US presidential debate. The index, which measures the dollar against six major world currencies, had its largest weekly drop in a month due in large part to a reduction of long-term interest rate expectations announced by the Federal Reserve at the conclusion of its policy meeting on Wednesday.
The dollar index was flat at 95.472 on the day. It fell by 0.7 percent for the week, its worst weekly performance since the week of August 18. It hit a session high after Boston Fed President Eric Rosengren said he believed US short-term interest rates should be raised now and warned a decline in the jobless rate below sustainable levels could derail economic recovery.
That moved markets in early trading but the move was reversed as traders saw Rosengren's comments as simply increasing the odds of a rate hike in December, which was already priced into the dollar, analysts said. "Probabilities (for a rate hike) are now very firmly in December," said Karl Schamotta, director of FX strategy at Cambrdige Global Payments in Toronto. "So that gives traders a good three-month window to pick up nickels in front of the steamroller."
Rosengren was one of three members of the Federal Open Market Committee to dissent at this week's policy meeting that left rates unchanged at a range of 0.25 to 0.50 percent. Sterling fell 1 percent against the dollar, sliding below $1.30, weighed by further Brexit uncertainty after comments from UK Prime Minister Theresa May reported by The Independent that contrasted a statement by Foreign Minister Boris Johnson on when the country would begin its exit from the European Union.
That report and others over the past few weeks about the British government's handling of the process "are making markets comfortable to stick with sterling shorts," said Vassili Serebriakov, FX strategist at Credit Agricole Corporate & Investment Bank. The dollar rose by 1 percent against the Canadian dollar after surprisingly weak inflation and retail sales data that suggested Canada could be facing lower growth and higher unemployment. "We could be looking at weakness in economic fundamentals and the currency in the next couple of months," Cambridge's Schamotta said.
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