Dollar falls against euro on ECB, Fed expectations

dollar bill close up fbn

The U.S. dollar hit its lowest level against the euro in more than 2-1/2 years on Wednesday on doubts about another Federal Reserve interest rate increase this year and expectations for European Central Bank hawkishness.

The euro hit $1.1909, its highest level against the dollar since January 2015. In contrast to the political risks and monetary policy uncertainty that have plagued the dollar, the common currency has drawn support from expectations that the ECB would eventually begin phasing out its easy policy.

St. Louis Federal Reserve President James Bullard said he was opposed to further U.S. interest rate increases by the central bank and warned that more hikes could hinder achievement of the Fed's 2-percent domestic inflation goal, Market News International reported on Wednesday.

Bullard's comments reinforced skepticism surrounding another Fed rate increase this year, analysts said. Expectations for another hike in December last stood at about 46 percent, according to CME Group's FedWatch tool.

"The market has reached a position where they think Fed hikes are going to be limited," said Jason Leinwand, founder and chief executive of FirstLine FX in Randolph, New Jersey. "Bullard’s comments would be more of a confirmation" of that view, he said.

While traders awaited Friday's July U.S. non-farm payrolls report, euro zone economic data has encouraged the view that the ECB is on a path toward tightening its monetary policy, which is considered a favorable scenario for the euro.

"Euro zone data just has constantly validated the optimistic outlook of the European Central Bank," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York.

The dollar index, which measures the greenback against a basket of six major rivals, touched a 15-month low of 92.548 and was last down 0.2 percent at 92.833. The dollar gained slightly against the yen and was last at 110.59 yen, hovering above a more than six-week low touched Tuesday of 109.91 yen.

Fears of a trade spat between China and the United States saw the U.S. currency score some early gains against its commodity-linked rivals such as the New Zealand and the Canadian dollar.

The dollar was last up 0.2 percent against the Canadian dollar at C$1.2557 after touching a 1-1/2-week high of C$1.2591 . The New Zealand dollar touched a one-week low against the greenback of $0.7411.

(Reporting by Sam Forgione; additional reporting by Saikat Chatterjee in London; Editing by Tom Brown and Andrew Hay)