Dollar drops to 2-week low vs yen on change in Fed outlook

NEW YORK (Reuters) – The dollar fell against most major currencies on Thursday, dropping to a two-week low versus the yen, pressured by the Federal Reserve’s cautious U.S. economic outlook suggesting the central bank is near the end of its tightening cycle.

The Fed’s dovish stance in Wednesday’s policy statement took the market by surprise even though it has preached patience and balance sheet flexibility for some time. Analysts said the statement felt like the Fed did a turnaround from its previous generally upbeat stance.

Over the last two months, the dollar index, which tracks the currency versus six major rivals, has fallen around 2.0 percent, on track for its worst two-month performance in a year.

The Fed said it would be patient in raising interest rates further this year as it pointed to growing uncertainty about the U.S. economic outlook.

But it did not rule out using a range of tools, including altering the size and composition of its balance sheet, as well as rate cuts, if the economy warranted it.

“The Fed meeting had to be the definition of an about-face,” said Mazen Issa, senior FX strategist at TD Securities in New York. “At the very least, the shift in stance augurs for continued U.S. softness.”

He expects the dollar’s downward path to be “more of a grind”, rather than an “impulsive shift lower.”

TD Securities has now changed its Fed forecast, Issa said. It expects the Fed to hike just one more time, instead of twice, and this would be the last for this cycle.

In mid-morning trading, the dollar fell 0.3 percent against the yen to 108.75 after earlier falling to a two-week low of 108.51.

The greenback also fell 0.2 percent against the Swiss franc, to 0.9921 franc, and was down 0.1 percent against the euro, which traded at $1.1487.

The dollar index, meanwhile, was flat on the day at 95.337, recovering from a three-week low.

Data showing that the number of Americans filing for unemployment benefits surged to near a 1-1/2-year high last week weighed on the dollar as well.

But the numbers may have been skewed by the five-week shutdown of the federal government that has since ended.

U.S. new home sales were upbeat, rising nearly 17 percent in November, but that did not impact the dollar.

Cautious words from the Fed sent perceived risk-oriented currencies such as the Australian dollar AUD= and the New Zealand dollar NZD= rallying against the greenback.

The Canadian dollar also benefited from a 15 percent rally in oil prices, with Canada a major exporter.

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