Wednesday, March 30, 2016

FOREX-Dollar drops on doubt U.S. rates will rise at all in 2016

* Dollar under broad pressure as markets scale back Fed hikes

* Yellen highlights external risks, stresses caution

* Commodity currencies gain as oil prices rise

By Jemima Kelly

LONDON, March 30 The dollar fell broadly on Wednesday, with a cautious tone from the head of the Federal Reserve leaving investors wondering if there would even be one U.S. rate hike this year and sending the greenback down more than 1 percent in the past 24 hours.

The Australian and New Zealand dollars, currencies that are closely correlated with commodity prices, both soared to nine-month highs as oil prices - which are U.S. dollar-denominated - rose and became cheaper for holders of other currencies.

The greenback had hit a two-week high against a basket of major currencies at the start of the week, boosted by a series of hawkish comments from Fed officials that gave investors the impression that U.S. interest rates could increase twice this year, with the first hike coming as soon as April.

But Fed Chair Janet Yellen poured cold water on those expectations on Tuesday, stressing the need to be cautious in raising rates and highlighting external risks including low oil prices and slower growth abroad.

Yellen sent the dollar index down by 0.8 percent - its biggest one-day fall in two weeks - to 94.79, a 12-day low.

"Having had such seemingly unambiguous guidance from the other FOMC (Federal Open Market Committee) speakers since the last FOMC meeting, where the message seemed to be very clearly to markets: you've taken this too dovishly, she seemed to send the opposite message," said RBC Capital Markets' head of currency strategy in London Adam Cole.

"I think the market is very confused about what it's supposed to think," Cole said, adding that the dollar should not fall much further from these levels.

The greenback dipped half a percent to a nine-day low of 112.135 yen, even as dismal Japanese data heightened speculation that Japan will need to muster more stimulus to avert another recession. Factory output fell 6.2 percent last month from the previous month, the biggest tumble since 2011.

The dollar also lost ground on the euro, which hit an almost-two-week high of $1.1331.

Fed fund futures <0#FF:> now have barely a quarter-point hike priced in for this year.

"Such a cautious stance suggests a rate hike in April is unlikely, and there are increased doubts that the Fed will be ready to move in June," said Westpac Bank senior currency strategist Sean Callow.

The New Zealand dollar was trading 1.5 percent higher on the day at $0.6965, while the Aussie was up as much as 0.9 percent at $0.7698. (Additional reporting by Lisa Twaronite in Tokyo and Ian Chua in Sydney; Editing by David Holmes)

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