Dollar on defensive after Fed minutes dampen rate hike prospects

The dollar index touched its lowest since October, before Donald Trump was elected U.S. president, as investors shifted to the view that Federal Reserve might not be the only game in town when it comes to higher interest rates.

TOKYO: The US dollar was on the defensive on Thursday after the minutes from the Federal Reserve's last policy meeting showed policymakers were increasingly wary of recent softness in inflation and could delay a rate hike.

The readout of the July 25-26 meeting showed some members called for halting interest rate hikes until it was clear the inflation trend was transitory, but it also indicated the Fed was poised to begin reducing its $4.2 trillion portfolio of bonds.

The dollar also stepped back to 109.84 yen, down 0.3 percent from late U.S. trade and down more than a full yen from Wednesday's high of 110.95.

The dollar's index against a basket of six major currencies slipped to 93.39 from Wednesday's three-week high of 94.145.

"There's no change in market expectations that the Fed will announce the start of balance sheet reduction in September. But markets think there's risk to the scenario of a rate hike in December," said Shunsuke Yamada, chief Japan FX strategist at Bank of America Merrill Lynch.

Money market futures are pricing in about a 40 percent chance the Fed will raise rates by December, compared to just under 50 percent before the Fed's minutes.

The euro gained 0.1 percent in early Asian trade to $1.1780, recovering from the previous day's low of $1.1681, its lowest level in nearly three weeks.

The common currency had dropped after Reuters reported sources saying European Central Bank President Mario Draghi will not deliver a new policy message at his planned Aug. 25 speech in the U.S. Federal Reserve's Jackson Hole conference.

The euro held firmer against sterling, fetching 91.335 pence , just under its Oct 11 high of 91.405, which is the highest level since 2009 except for a few moments during the pound's flash crash on Oct 7.

The euro has been strengthening against sterling since April on speculation Brexit will hurt the UK economy more than it does the euro zone.

"Buying in euro/pound was one of the easiest trades. We could see some selling at current levels but if the euro rises clearly above 91.50, we could well have talk of a rise to parity (against the pound)," said Bart Wakabayashi, Tokyo Branch Manager of State Street.

The dollar's diminishing rate hike prospects gave a big boost to other major currencies that compete with the dollar for yield attraction.

The Canadian dollar had gained more than 1 percent on Wednesday and last stood at C$1.2612 to the dollar, having hit a near two-week high of C$1.2605 earlier in the day.

The Australian dollar stood at $0.7933, maintaining Wednesday's 1.3 percent gain, its biggest daily rise in about a month.

The currency showed a subdued reaction to mixed reading on local employment data, which showed a fall in the unemployment rate led by a bounce in part-time work, but also showed a fall in full-time jobs.

The U.S. dollar was also undermined by worries over U.S. President Donald Trump's ability to implement his economic policies after he disbanded two high-profile business advisory councils.

The move came after several chief executives quit in protest over his remarks blaming weekend violence in Virginia not only on white nationalists but also on anti-racism activists who opposed them.

"I would expect more U.S. political risks in September as the debt ceiling issue will be coming up. We could see more volatilities in markets," said Merrill's Yamada.

The Congressional Budget Office has said U.S. lawmakers need to raise the debt ceiling by mid-October to avoid defaulting on debt payments. - Reuters