Dollar falls, retraces losses as Fed minutes seen dovish

By Sam Forgione

NEW YORK (Reuters) - The dollar touched its lowest level against the euro in over two weeks but quickly pared its losses after minutes released on Thursday from the Federal Reserve's September meeting reinforced the view that the central bank would not hike U.S. rates until next year.

The minutes showed that Fed policymakers acknowledged the possibility that downside risks to economic activity had increased somewhat, and that several participants were worried that inflation could be dragged even lower.

The Fed surprised much of Wall Street by keeping interest rates unchanged at the September meeting.

"The dollar is reacting negatively to the slightly more dovish comments about near-term prospects for inflation," said Patrick Maldari, senior fixed-income investment specialist at Aberdeen Asset Management in New York.

While the dollar initially slumped after the minutes on the interpretation that they were more dovish than expected, it soon pared losses on the view that the minutes did not differ greatly from Fed Chair Janet Yellen's comments at a press conference in September.

The euro initially hit $1.13280, its highest level against the greenback since Sept. 21, after the minutes. Against the Swiss franc, the dollar hit 0.96230 franc, its lowest level in nearly three weeks.

The dollar index, which measures the greenback against a basket of six major currencies, also hit its lowest level in nearly three weeks after the minutes, at 94.984. The index pared losses, however, and was last down 0.21 percent at 95.294, or roughly unchanged from its level prior to the release of the minutes <.DXY>.

Analysts said that, despite the initial dip in the dollar, the minutes merely reinforced expectations that the Fed would delay hiking rates for the first time since 2006 until next year.

"The minutes don’t change the narrative that caution will carry the day," said Mazen Issa, senior currency strategist at TD Securities in New York.

Federal funds futures implied traders still see only a 7 percent chance of the FOMC raising rates at its Oct. 27-28 meeting and a 39 percent chance of such a move at its Dec. 15-16 meeting.

The euro was last up 0.33 percent against the dollar at $1.12750 and was down 0.71 percent against the franc at 0.96660 franc .

On Wall Street, the benchmark S&P 500 <.SPX> stock index ended up 0.88 percent. [.N]

(Reporting by Sam Forgione; Additional reporting by Gertrude Chavez-Dreyfuss in New York and Patrick Graham in London)

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