Dollar slides on likelihood of low rate decision

The dollar stayed close to its three-year low on expectations that the US Federal Reserve would this week signal that it is committed to ultra-low interest rates for the foreseeable future.

Investors have been encouraged to adopt strategies that bring them better returns – particularly carry trades, where the dollar’s low yield has provided the funds to invest in riskier but higher-yielding assets.

The selling of the dollar into such trades has led to the build-up of substantial short positions – bets on the US dollar moving lower – according to data from the Commodity Futures Trading Commission.

Dollar weakness has persisted since Standard & Poor’s, the rating agency, last week warned about its long-term outlook on US sovereign debt due to problems with the country addressing its budget deficit. The Fed’s open market committee on Wednesday is therefore expected to continue its policy of leaving the federal funds rate – currently at a range between 0-0.25 per cent – on hold for an extended period.

The Australian dollar has benefited from the US dollar’s weakness. On Monday it rose to a 29-year high at $1.07514, although late in the day in the US it was down 0.2 per cent at $1.07220.

Malaysia’s ringgit advanced above M$3 against the US currency for the first time in 13 years after hawkish comments from the country’s central bank ahead of its policy meeting. Bank Negara Malaysia is expected to raise its main policy rate by 25 basis points to 3 per cent at its May 5 meeting. The bank has kept rates at 2.75 per cent since July.

“We’ve seen increased hawkishness from the BNM on the increased need to restrain inflationary pressures through both rate hikes and currency gains,” said Nick Chamie at RBC Capital Markets.

The ringgit climbed as high as M$3.0140, before easing back to M$2.9920, up 0.5 per cent on the day.

The yen and the euro climbed at the expense of the dollar. The euro was up 0.1 per cent to $1.4579, and the yen was up 0.2 per cent to Y81.68. Sterling, however, fell 0.1 per cent to $1.6492.

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