Dollar Weakens As Buck's Rally Enters 'Holding Pattern'

The dollar traded lower against its rivals Wednesday, continuing a bearish pattern that has persisted since Federal Reserve policy makers a week ago signaled that they are being cautious about hiking rates too quickly.

The euro (EURUSD) was at $1.0996, compared with $1.0924 late Tuesday in New York. The single currency briefly rose above the $1.10 threshold after the Commerce Department said durable-goods orders declined by a seasonally adjusted 1.4% in February (http://www.marketwatch.com/story/february-durable-goods-orders-drop-14-in-weak-report-all-around-2015-03-25).

The dollar has weakened against the euro during three of the past five sessions.

The dollar (USDJPY) was at Yen119.33, compared with Yen119.74. The pound (GBPUSD) rebounded against the buck, trading at $1.4916, compared with $1.4847.

Brian Daingerfield, a foreign-exchange strategist at Royal Bank of Scotland, said that the dollar rally has entered "a holding period." Traders are unwilling to renew bets that the dollar will rise until stronger economic data emerge.

The Fed has said it would be data-dependent when determining the timing of the first federal-funds rate increase since 2006, which means that the strength of economic data in the coming weeks will be crucial in determining whether a June rate hike remains a possibility.

"The data we've seen over the last couple of days hasn't been significantly weaker," Daingerfield said, adding that a lot is riding on the next Friday's nonfarm payrolls report, especially since the Fed expressed concerns about a moderation in U.S. growth in the first quarter.

"If employment data continue to improve, that might be enough to give the Fed reasonable confidence that inflation will rise over time, and that's the key condition it has been looking for to unlock rate hikes," Daingerfield said.

The Labor Department said Tuesday that core consumer-prices rose about 0.2% on an annualized basis in February, (http://www.marketwatch.com/story/consumers-pay-higher-prices-in-february-for-first-time-in-four-months-2015-03-24) the first rise in four months, in-line with the expectations of economists polled by MarketWatch. Data showed new-home sales rose in February, while wage growth remained stagnant.

After their two-day March policy meeting, Fed policy makers surprised the market by suggesting they would wait longer before raising the benchmark Fed funds rate. They also signaled that subsequent rate increases would happen more gradually than previously thought.

Emerging markets

The Mexican peso (MXNUSD) and Brazilian real (BRLUSD) extended their gains against the dollar from the past week on Wednesday, while the Turkish lira (TRYUSD) was flat.

Expectations that the Fed will wait to raise rates, and the subsequent move lower in Treasury yields, and higher in crude-oil prices, have given emerging markets a bit of a reprieve, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

However, Chandler expects strength in currencies in emerging markets to be short-lived.

"This could last a little bit longer, maybe into next week's U.S. jobs data," Chandler said. "The correction was long overdue so it's a bit sharper than expected."