NEW YORK (BLOOMBERG) - The US dollar plunged on Wednesday (Feb 3) by the most since the Federal Reserve announced the start of its Treasury bond-buying programme seven years ago, as signs of a slowing US economy helped derail bets on diverging policies between global central banks.
The US currency sank at least 1.7 per cent against nine of its biggest peers amid concern that growth in the world's largest economy is cooling.
The US dollar on Thursday also fell to its lowest since the start of this year to the Singapore dollar. One US dollar was trading at 1.4153 to the Singdollar as of 8.59am, down 1.08 per cent from its Wednesday's close.
Currency traders are catching up to the bond market, where 10-year yields sank to the lowest in a year on Wednesday and futures are sending the strongest signal yet that traders expect the Fed to stand pat this year.
"The currencies market has been at odds with the rates market, and now the rates market is winning," said Mr Peter Gorra, head of foreign-exchange trading in New York at BNP Paribas. "There's a disconnect where the Fed says it's four hikes while the market says it's like 0.7 hike this year - someone is wrong."
Concern about a global demand slump and policymakers' response to a slowing growth worldwide has put the US$5.3 trillion (S$7.5 trillion)-a-day currency market in disarray. The US dollar's pullback this week has reversed all the yen's decline against the greenback on Friday when Bank of Japan introduced negative interest rates to revive inflation, which is stuck near zero.
The Bloomberg Dollar Spot Index, which tracks the US currency against 10 global peers, slumped 1.7 per cent as of 5pm on Wednesday in New York. It dropped as much as 1.9 per cent, the biggest loss since 2009 when the Fed opened another front in its battle to boost the economy by pledging to buy as much as US$300 billion of Treasuries and stepping up purchases of mortgage bonds.
The US dollar slid 1.7 per cent to 117.90 yen, erasing all the gains since the Bank of Japan's surprise Jan 29 move to negative interest rates on certain deposits. The greenback fell 1.7 per cent to US$1.1105 per euro, the lowest since October.
New York Fed president William C Dudley said in an interview with Market News International that policymakers are "acknowledging that things have happened in financial markets and in the flow of the economic data that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward".
A report on Wednesday showed US service industries expanded in January at the slowest pace since 2014, dimming the outlook for growth.
The January employment report on Feb 5 may determine whether the US dollar sell-off will continue. The payroll data will show the US created fewer than 200,000 jobs for the first time since September, according to economists surveyed by Bloomberg.
"Presumably investors are betting that lingering risk-off will stay Fed's hand when it comes to further tightening," said Mr Valentin Marinov, head of Group-of-10 currency strategist at Credit Agricole's corporate and investment banking unit in London. "It would take disappointing US data today and Friday to see the dollar coming under sustained selling pressure."