The U.S. dollar plunged Wednesday, with a greenback-related exchange traded fund dipping below its long-term trend line, as the worsening economic outlook and ongoing volatility added to skepticism that the Federal Reserve would pull the trigger on another rate hike anytime soon.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) fell 2.0% Wednesday, dropping below its 200-day simple moving average. UUP tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
Meanwhile, the PowerShares DB US Dollar Index Bearish Fund (NYSEArca: UDN), which takes the inverse or short performance of the U.S. dollar against the same basket of six major currencies as UUP, gained 2.0%.
The Dollar Index, which tracks a basket of developed market currencies, declined 1.9% to 96.96.
On Wednesday, the U.S. dollar slipped to its lowest level against the euro since last October and erased most of its gains against the Japanese yen over the past few weeks, reports Sam Forgione for Reuters.
The CurrencyShares Japanese Yen Trust (NYSEArca: FXY) rose 2.4% Wednesday while the CurrencyShares Euro Currency Trust (NYSEArca: FXE) gained 2.0%. FXE is also now testing its 200-day simple moving average.
The U.S. dollar weakened against foreign currencies after William Dudley, president of the Federal Reserve Bank of New York, said that financial conditions have tightened in the past few weeks since the Fed hiked interest rates.
“One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting,” Dudley told MNI. “So if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision.”
The U.S. dollar has previously been strengthening on the prospect of a tighter monetary policy, which would help remove some of the excess liquidity sloshing around in the economy. However, without the Fed’s support, the greenback looks less attractive.
Additionally, the weaker-than-expected economic data that revealed the U.S. services sector expanded at a slower pace month-over-month also weighed on expectations the Fed would hike rates again soon, which further pressured the USD.
“Fed rate forecasts are coming under fire,” Joe Manimbo, senior market analyst at Western Union Business Solutions, told Reuters, referring to Fed policymakers’ forecasts in December of four U.S. interest rate hikes in 2016. “The notion of a sidelined Fed over the course of 2016 is gaining traction with every sub-par reading on the U.S. economy.”
PowerShares DB U.S. Dollar Index Bullish Fund
Max Chen contributed to this article.