Dollar Ends 7-Week Gain on Oil Slump Before Fed Meets on Rates

(Bloomberg) — The dollar snapped seven weeks of gains as tumbling oil prices dragged down inflation expectations and the global economic outlook, fueling speculation the Federal Reserve may rethink the timing of an interest-rate increase next year.

The Bloomberg Dollar Spot Index fell before the Fed meets Dec. 16-17 and discusses its vow to hold rates low for a “considerable time.” The yen gained for the first week in almost two months as Japan prepared to vote in national elections. Norway’s krone fell to an 11-year low and the ruble plunged to a record as crude sank below $58 a barrel for the first time since 2009. The Swiss franc strengthened.

“The dramatic drop that we’ve seen in oil suggests that it could be a closer call on the Fed and whether or not it ditches its lower rate guidance,” said Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. “This general flight for safety has depressed Treasury yields to the point where it’s pulled the dollar lower.”

Bloomberg’s gauge of the dollar declined 0.6 percent this week in New York, the first weekly drop since Oct. 17 and the biggest since the five days ended Oct. 10. The measure, which closed Dec. 5 at a five-year weekly high of 1,122.34, has gained this year amid speculation the Fed is moving toward raising interest rates as the world’s biggest economy improves.

The greenback weakened 2.2 percent to 118.75 yen in the biggest decline since August 2013. The dollar depreciated 1.4 percent to $1.2462 per euro, while the 18-nation currency fell 0.8 percent to 147.99 yen.

Yields on Treasury two-year notes dropped 10 basis points, or 0.10 percentage point, to 0.54 percent, damping the attraction of dollar-denominated assets.

Ruble Slides

Russia’s ruble was the biggest loser among the greenback’s 31 major peers this week, declining 9.3 percent. It reached a record-low 58.526, even as the central bank increased interest rates 1 percentage point to 10.5 percent, with central bank Governor Elvira Nabiullina saying she stands ready to take unorthodox steps if the situation worsens.

The currency is down 44 percent this year amid the oil rout and U.S. and European sanctions over Russia’s support for an armed insurgency in Ukraine.

Crude touched $57.34 a barrel in New York, the lowest since May 2009, after trading at $107.73 six months ago. The International Energy Agency cut its forecast for global oil demand in 2015 for the fourth time in five months.

Krone Slumps

In Norway, western Europe’s largest oil exporter, the krone slumped 2.6 percent this week to 7.3511 per dollar and touched 7.3970, its weakest since September 2003. The currency sank 4 percent to 9.1528 per euro and reached 9.1920, the weakest since January 2009.

The Norges Bank lowered interest rates for the first time in more than two years on Dec. 11. Preventing a “severe downturn” is the major concern of policy makers, and there’s a 50 percent chance the central bank will cut again next year, Governor Oeystein Olsen said.

The yen led gains versus the dollar, rising versus all of its 31 major peers. The Japanese currency has tumbled 30 percent in the past two years as Prime Minister Shinzo Abe implemented fiscal spending and structural reform and the Bank of Japan applied unprecedented monetary stimulus to battle deflation.

‘Too Rapid’

“The recent dollar-yen rally has been too rapid,” Shusuke Yamada, a foreign-exchange strategist at Bank of America Merrill Lynch in Tokyo, said in an interview on Bloomberg TV’s “On the Move” with Rishaad Salamat. “I’d expect some correction or at least consolidation for the next three months, which would depend on the election outcome.”

Abe is looking to renew a mandate for economic and fiscal reform when voters head to the polls on Dec. 14. Abe’s ruling Liberal Democratic Party and its coalition partner will win more than the 317 lower-house seats they need for a two-thirds majority, the Nikkei newspaper forecast, citing a survey.

The euro rallied versus most major peers, even as it fell against the Swiss franc. Switzerland’s currency gained as central-bank officials vowed to the defend the 1.20 franc-per- euro cap, saying the risk of deflation has increased. The franc appreciated 0.1 percent to 1.20113 per euro and touched 1.20086, the strongest since September 2012.

U.S. policy makers meeting next week will weigh their low- rate pledge against signs inflation is sluggish even as the economy is improving. Wholesale prices in the U.S. fell 0.2 percent last month, more than forecast, even as retail sales and payrolls gained, data showed.

Below Target

The U.S. central bank’s preferred measure of inflation, a gauge tied to personal consumption expenditures, has stayed below policy makers’ 2 percent target for more than two years.

The Fed has held the benchmark interest-rate target in a range of zero to 0.25 percent since 2008 to support the economy.

“If we do get a change in that language, I think the dollar will probably will bounce off these levels, but probably won’t retest its recent highs,” Omer Esiner, chief market analyst at the currency brokerage Commonwealth Foreign Exchange Inc. in Washington, said by phone yesterday. “It’s going to take a lot, probably a big hawkish surprise, to see the dollar end the year at new highs.”

–With assistance from Lananh Nguyen in New York.

To contact the reporter on this story: Rachel Evans in New York at [e-mail] To contact the editors responsible for this story: Dave Liedtka at [e-mail] Greg Storey, Paul Cox