Dollar index wallows close to three-week low on Fed uncertainty

The dollar languished around three-week lows against a basket of currencies on Tuesday, as expectations faded that the U.S. Federal Reserve would hike interest rates as early as this month.

The dollar index .DXY, which tracks the U.S. currency against a basket of six major counterparts, edged slightly higher in early Asian trade to 94.893, but remained close to its overnight low of 94.619.

“More investors are starting to believe that the Federal Reserve could delay lift-off until 2016 and this view is weighing heavily on the currency,” Kathy Lien, managing director of FX Strategy for BK Asset Management, said in a note to clients.

While Lien remains a long-term dollar bull who believes that the Fed has delayed and not canceled its plans to raise interest rates for the first time since 2006, in the short term, she said, “this could be another painful week for the greenback.”

Forty-six of 66 foreign exchange strategists surveyed by Reuters last week said a further delay posed a significant risk to dollar strength and two said the risk was very significant.

The U.S. central bank will hold just two more policy meetings in 2015: on Oct. 27-28, and then in December.

Atlanta Fed President Dennis Lockhart said on Monday that the central bank will have a “lot more” data to ponder at its December review than at its meeting later this month.

Market activity was light on Monday due to the U.S. Columbus Day holiday, which shut U.S. bond markets. Monday was also a national holiday in Japan.

Against the yen, the dollar was up at 120.05 yen, solidly in the middle of its well-worn range against the Japanese unit.

One-month dollar/yen implied volatility, which measures the cost of hedging against sharp swings in the yen, stood at 8.475 percent, its lowest since Aug. 21, and far below two-year highs above 13 percent touched as recently as late August.

The euro was steady at $1.1355, after scaling a three-week peak of $1.1397 on Monday.

Against the yen, the euro was flat at 136.29.

The Australian dollar edged down 0.2 percent to $0.7344, after rising as high as high as $0.7382 on Monday, its highest since late August.

Source: Reuters