The dollar posted its biggest two-day drop since March 2009, extending a decline that wiped out its rally at the start of the year.
The greenback fell against all of its 16 major peers. Signs of a slowing U.S economy have hurt the dollar by derailing wagers on diverging policies between central banks. Currency traders are catching up to the bond market, where 10-year yields sank to the lowest in a year on Wednesday and futures sent the strongest signal yet that traders expect the Federal Reserve to stand pat on rates in 2016.
“The currencies market has been at odds with the rates market, and now the rates market is winning,” said Peter Gorra, head of foreign-exchange trading in New York at BNP Paribas SA. “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 policy makers’ response to a slowing growth worldwide has put the $5.3 trillion-a-day market in disarray. The dollar’s pullback this week has reversed all the yen’s decline against the greenback on Friday when the Bank of Japan introduced negative interest rates to revive inflation, which is stuck near zero.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 global peers, fell 0.7 percent to 1,219.52 as of 10:25 a.m. in New York, adding to Wednesday’s 1.7 percent drop. It’s below its level at the end of 2015.
The dollar slipped 0.6 percent to 117.14 yen, after erasing all its gains since the BOJ’s surprise Jan. 29 move. The greenback weakened 0.8 percent to $1.1190 per euro, and has fallen every day this week.
“The dollar’s weakness looks like a correction in its multi-year bull trend given the Fed is still more likely than other major central banks to tighten rather than ease monetary policy this year,” said Mansoor Mohi-uddin, senior markets strategist in Singapore at Royal Bank of Scotland Group Plc. “We remain, though, cautious about greenback strength against the yen.”
The bond market’s balance tipped toward zero rate hikes this year. Futures show traders expect the Fed’s effective rate to reach 0.495 percent by year-end. That level is closer to the current effective overnight rate of 0.38 percent than it is to 0.625 percent, where it may stand if the central bank raises its target range by a quarter-point again, following liftoff from near zero in December.
New York Fed President William C. Dudley said in an interview with Market News International that policy makers 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 showed U.S. 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 dollar selloff will continue. The payrolls data will show the U.S. created fewer than 200,000 jobs for the first time since September, according to economists surveyed by Bloomberg.
“Investors are betting that lingering risk-off will stay Fed’s hand when it comes to further tightening,” said Valentin Marinov, head of Group-of-10 currency strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “It would take disappointing U.S. data today and Friday to see the dollar coming under sustained selling pressure.”