NEW YORK (AFX) -- The dollar extended losses against major rivals Tuesday after minutes from the latest Federal Reserve monetary-policy meeting suggested the policy-making board could be at the end of its cycle of tightening interest rates.
At the same time, weaker-than-expected housing data, a tame reading of U.S. core wholesale inflation, and dovish comments from San Francisco Fed President Janet Yellen also weighed on the greenback.
Most members of the Federal Reserve Open Market Committee agreed that the Fed's recent chapter of steady rate hikes was coming to a close, according to a summary of the March 27-28 meeting released Tuesday. 'Most members thought that the end of the tightening process was likely to be near and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy,' the summary said.
The Fed has hiked rates for 15 straight meetings, bringing rates back to 4.75% after hitting a low of 1.0% in the spring of 2004.
'This is definitely more dovish than the market was expecting,' said Kathy Lien, chief strategist at Forex Capital Markets. 'But most worrisome for dollar bulls was the fact that Fed members saw that an end of rate rises was probably near and some feared tightening too much.'
In late New York trading, the dollar was changing hands at 117.09 yen, down 0.6% from late Monday. The euro was up 0.8% at $1.2351. The British pound rose 0.8% to $1.7830, while the dollar was last down 0.9% at 1.2686 Swiss francs.
The dollar index, which compares the U.S. currency to a handful of the world's major currencies, dropped to 88.15, the lowest level since Jan. 25.
Rate outlook
The odds that the Federal Reserve will raise interest rates to 5.25% in June faded on Tuesday in the wake of the FOMC minutes, Yellen's remarks and the inflation report. In the federal funds futures market at the Chicago Board of Trade, investors were pricing in a 28% chance of a rate hike in June, down from 54% earlier. The market still expects the Fed to boost its overnight rate to 5.25% by the August meeting.
'The Fed's dovish comments have the market assuming that after the next hike, they will be done. Dollar losses were extended against all major currencies,' said Kurt Hoeksema, chief foreign exchange dealer at Global Forex Trading.
But Joel Ward, manager of the Joel Nathan ForexFund, said with future monetary policy decisions more dependent on data, 'if there's positive data in the near future, then the Fed may have reason to adjust interest rates further.'
FXCM's Lien said inflation remains a big concern for the Fed given the recent rise in energy prices, 'which means that we will see one or two more rate hikes, making 5 or 5.25 percent still the most likely top.'
Yellen worried about overshooting
The FOMC minutes reinforced the dovish tone earlier in Fed Gov. Yellen's comments that an end to the tightening cycle is near,' said Brian Dolan, head of currency research at Gain Capital. 'This keeps the near-term outlook negative for the dollar.'
In a speech to the Bay Area Council in San Jose, Calif., Yellen said she's getting increasingly worried that the Fed may push interest rates too high.
'I am increasingly concerned about the well-known long and variable lags in monetary policy -- specifically, that the delayed effects of our past policy actions might impact spending with greater force than expected,' she said on Tuesday. Yellen has a vote this year on the FOMC.
Inflation risks are currently tilted 'slightly' to the upside, but inflation should remain well contained in the future, she added.
Tame core PPI, weak housing data
The dollar had earlier weakened after data showed outside of food and energy, the core producer price index increased 0.1% in March, the smallest gain since November. Economist had been expecting the core to rise 0.2%.
U.S. producer prices rose 0.5% in March as gasoline prices showed their largest gain in 17 months, the Labor Department said Tuesday. Economists surveyed by MarketWatch had been expecting for last month's PPI to rise 0.4%.
The PPI is up 3.5% in the past year, the lowest year-over-year gain since September 2004. Core prices are up 1.7% in the past year, the same year-over-year gain as last month.
Separately, new construction of U.S. houses fell 7.8% to a seasonally-adjusted annual rate of 1.960 million units in March, the lowest level in a year. Economists were calling for a decline to 2.04 million.
The data 'will remove some of the Fed pressure to raise interest rates going out in the future,' said John McCarthy, director of foreign-exchange trading at ING Capital Markets. The market believes 'U.S. rates will rise more slowly or will stop rising.'
The ongoing slowdown in the U.S. housing sector 'will likely cause the Fed to pause' after that, he added. Fed policymakers are scheduled to meet May 10 in Washington.
Persistent worries about tensions between Iran and the West and the possibility of U.S. military intervention in Iran also weighed on the dollar. This story was supplied by MarketWatch. For further information see www.marketwatch.com.