Dollar Weakens on Falling Oil, Fed Outlook

December 11, 2015 Wall Street Journal

Tumbling commodity prices aggravate investor concerns about health of global economy

By James Ramage

The dollar retreated against the yen and the euro on Friday as tumbling oil pricesdestabilized markets and depressed inflation, dimming expectations for the Federal Reserve to raise interest rates at a rapid pace over the coming year.

The dollar fell 0.4% against the common currency, as one euro bought $1.0986 in late-afternoon trade. The U.S. currency shed 0.9% this week. The dollar declined 0.5% versus the yen, heading toward a five-week closing low of ¥120.90, and falling 1.8% for the week.

The dollar drifted lower as prices for crude fell for a sixth consecutive session, reaching their lowest levels in about seven years. Light, sweet crude for January delivery slid 3.1% on Friday, to $35.62 a barrel on the New York Mercantile Exchange; Brent, the global benchmark, declined 4.5%, to $37.93 a barrel on ICE Futures Europe.

Tumbling commodities prices, highlighted by crude’s fall, have aggravated investors’ concerns about the health of the global economy and rising price swings across markets. They also have applied steady downward pressure on U.S. consumer prices, helping to hold inflation well below the Fed’s 2% target.

Most investors expect the Fed to raise interest rates at its Dec. 15-16 policy meeting, but many also realize the central bank’s pace of tightening boils down to stronger U.S. economic numbers.

The dollar’s prospects for 2016 rest on investor conviction that the Fed will raise U.S. borrowing costs faster than the gradual pace the central bank has communicated to markets, said Karl Schamotta, director of currency risk and strategy at Cambridge Global Payments, which hedges currencies for corporations.

Higher U.S. interest rates would make the dollar more attractive to yield-seeking investors.

“For today’s moves in the dollar, look to oil prices,” Mr. Schamotta said. “Lower commodity prices depress the expected path of Fed interest-rate increases into 2016.”

In other news, the Chinese yuan fell 0.5% to 6.5301 a dollar, on track for its weakest New York close since April 2011. The yuan declined after the People’s Bank of China on Friday signaled it could potentially slacken its already loose peg to the dollar and instead allow it to track a basket of currencies of its broader trading partners.

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