LONDON: The dollar fell to a three-week low against the yen on Thursday, as investors cut favourable bets after minutes of the Federal Reserve's last meeting prompted many to push out expectations for the likely timing of an interest rate rise.
US Treasury yields and the implied rates on Fed fund futures fell sharply after the minutes with the market not seeing any appreciable rise in the Fed's target rate until around September 2015, from June 2015 previously.
The dollar, which has a good correlation with US yields and rate expectations, fell 0.4 percent to 107.65 yen on trading platform EBS, its lowest level since mid-September.
The dollar index, which measures the greenback against a basket of major currencies also shed 0.2 percent to 85.066, its lowest level in two weeks. It had hit a four-year peak of 86.746 on Friday.
"Fed minutes caught the market wrong-footed," said Susanne Galler, currency strategist at Jefferies.
"Considering the hawkish market interpretation of the Fed meeting in September, on the back of higher "dots", the Fed's more cautious language in the minutes caused some confusion.
We see positioning as the key factor for the market's reaction." Investors have been buying the dollar for 12 straight weeks, its longest winning streak in four decades, helped by a recent string of upbeat US data.
The latest nonfarm payrolls released last Friday had led dollar bulls to believe the Fed might hike interest rates sooner rather than later.
But minutes released on Wednesday suggested the central bank was in no such hurry. In fact, policymakers were worried the recent rally in the greenback might slow the gradual increase in inflation towards the Fed's 2 percent goal.
"This is the first time that the Fed has referenced this in this cycle," Morgan Stanley analysts said in a note. As a result, they said, the dollar is undergoing a correction which is likely to extend further in the near term.
AN EYE ON DRAGHI
The dollar retreated further from a six-year high of 110.09 against the yen, leading to sharp two-way moves and a jump in intra-day volatility.
"Last week it was a pretty clear-cut 'buy the dollar' scenario, but this week .
.. we're seeing a lot of two-way action," said Stephen Innes, senior trader for OANDA in Singapore.
He added that the dollar's dip below support at 108 yen this week could open the way for a further pull-back, at least in the short-term.
The dollar's sell-off saw the euro gain 0.2 percent to $1.27685, its highest level in two weeks, and more than two cents above a two-year trough near $1.2500 set last week.
The euro's gains will not be good news for the European Central Bank, which is pinning its hopes on a weaker exchange rate.
A weaker euro could revive growth through exports and help avert the threat of deflation.
ECB President Mario Draghi is set to speak later on Thursday and is likely to highlight the growing divergence in monetary policy outlooks between the United States and the euro zone and say again that the central bank is keeping all its options open -- including quantitative easing.
With the dollar on the back foot, commodity and emerging market currencies got a lift.
The Australian dollar rose 0.4 percent to $0.8875, pulling away from a four-year low of $0.8642 set last week.
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