The dollar dropped to a three-week low on Friday, a day after the Federal Reserve again kept interest rates on hold, as investors focused on the risks of the global slowdown to the US economy. The Fed's inaction on Thursday was largely expected. It was its dovish message, specifically the uncertain global growth outlook that could weigh on the world's largest economy, that took the market by surprise.
Investors had anticipated two scenarios: a Fed hike with dovish undertones, or no move, but with upbeat comments about the US economy. The Fed decision largely disappointed those that wanted to get the process of normalising rates going even at a gradual pace. "It's difficult to envision an environment where slowing global growth, a strong dollar, and a litany of factors such as the oil glut and the slow meltdown in emerging markets, resolve themselves in the last few weeks of the year, at least enough to give the Fed confidence to raise rates," said Christopher Vecchio, currency analyst at DailyFX in New York.
Markets have therefore reduced expectations for a rate increase this year. Rates futures placed a 14 percent chance on Friday that the Fed would raise rates in October, down from 41 percent early on Thursday, according to CME Group's FedWatch program. In mid-morning trading, the dollar index was down 0.1 percent at 94.411, after earlier dropping to a three-week low of 94.063.
The Australian dollar was up 1.1 percent against the greenback at US $0.7246, while the New Zealand dollar rose 0.6 percent to US $0.6428. The euro, meanwhile, was down 0.3 percent against the dollar at $1.1404, having hit a three-week high of $1.1459 earlier. Against the yen, the dollar fell 0.4 percent to 119.56 yen.
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