published Jun 29th 2016, 4:08 pm, by Susanne Barton and Lananh Nguyen

(Bloomberg) —
The dollar dropped for a second day, extending its loss for the first half of this year, as traders wager the Federal Reserve is more likely to cut interest rates than raise them in upcoming meetings.

The U.S. currency fell against most of its major peers as the combination of uneven economic indicators and global headwinds gave the central bank less scope to add to its December rate increase. While a flight to quality stemming from the U.K.’s vote to leave the European Union last week sent global investors flocking to the dollar, the outlook for the slower Fed tightening has re-emerged and dimmed its strength.

“It’s the market repricing expectations for the Fed and Fed hikes,” said Richard Cochinos, London-based head of Europe Group-of-10 currency strategy at Citigroup Inc., the world’s biggest foreign-exchange trader. “The market is not pricing in any type of hiking scenario. What drives the dollar is expectations on relative growth and real interest rates.”

Demand for the greenback has waned this year as Fed policy makers at their March 15-16 meeting cut the number of expected rate hikes this year to two, from four. And after skipping a rate increase at a meeting earlier this month, Fed Chair Janet Yellen cited the risks from Brexit, dimming the relative allure of the U.S. currency.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, is set for a 3.8 percent loss during the first half of the year. Among major peers, it lost the most against the Brazilian real and South African Rand. The index fell 0.5 percent as of 5 p.m. in New York.

Cochinos expects the dollar to trade in its range of $1.08 to $1.15 against the euro, compared with about $1.11 on Wednesday.

Fed Odds

The dollar has fallen this year even as analysts projected gains. At the beginning of the year, the median forecast in a Bloomberg survey was for $1.04 per euro by the end of June. The greenback was estimated to reach 124 yen, compared with about 103 on Wednesday.

Strategists and economists forecast the dollar will strengthen to $1.10 per euro and 110 yen at the end of the year.

“We’re positioning the portfolios assuming that the dollar is going to remain relatively strong,” said Jason Thomas, Los Angeles-based chief investment officer of Savos Investments, a unit of AssetMark Inc., an asset manager that oversees $29.9 billion. He sees the currency recouping losses later this year because of its appeal as a haven and the potential for easing by central banks in Europe.

The market-implied probability of a Fed rate boost by year-end was 15 percent, futures data compiled by Bloomberg show. That’s down from a 50 percent chance assigned on June 23 before the U.K. vote. Traders are pricing in a 4 percent chance of a rate cut by the Fed’s September meeting.

“The Brexit vote has the potential to create new headwinds for economies around the world, including our own,” Fed Governor Jerome Powell said Tuesday. “Monetary policy will need to remain supportive of growth, as we work through the challenging global environment.”

To contact the reporters on this story: Susanne Barton in New York at swalker33@bloomberg.net ;Lananh Nguyen in New York at lnguyen35@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Paul Cox, Michael Aneiro
COPYRIGHT
© 2016 Bloomberg L.P