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Dollar fails to keep up the pace with the Fed

The U.S. dollar stumbled against a basket of currencies on Thursday, even as the Federal Reserve's minutes indicated that a December rate rise is on the cards -- albeit at a gradual pace.

Most markets anticipated that the economic conditions in the U.S warranted a rate hike by December, but the Federal Open Market Committee's comments hinting at a slower rate of growth for the U.S. economy has caused some dollar bulls to take profits, according to analysts.

Federal Reserve Chair Janet Yellen speaks at the University of Massachusetts in Amherst, Massachusetts on Sept. 24, 2015.
Mary Schwalm | Reuters
Federal Reserve Chair Janet Yellen speaks at the University of Massachusetts in Amherst, Massachusetts on Sept. 24, 2015.

"The Fed is trying to change the emphasis from when they raise rates, to the pace at which they do so. They re-iterated the gradual pace of future rate moves, and this has led to some profit-taking in the dollar," senior currency strategist at Rabobank, Jane Foley told CNBC.

The dollar index fell as much as 0.5 percent to 99.166 against both a group of major currencies and the euro, to trade around $1.07.

The Japanese yen gained 0.5 percent against the greenback after the Bank of Japan kept policy unchanged.

Deutsche Bank adjusted its expectations of the timing of the first U.S. rate rise in nearly a decade, with economists from the bank stating they had joined the December "liftoff camp" after the Fed released minutes from its October meeting on Wednesday.

Investors have recently built up long positions in the dollar, or bets on further strengthening for the currency, Foley said, but some closing of these positions following the Fed's caution about the pace at which it raises rates weighed on the greenback.

"It was noted as well that the longer-run normal level to which the nominal fed funds rate might be expected to converge…would likely be lower than in previous decades reflecting a slower rate of potential growth. The comments regarding gradual tightening while not entirely new have weighed on the U.S. dollar," said currency analyst at Bank of Tokyo-Mitsubishi, Lee Hardman.

But longer term, dollar strength -- and even parity against the euro -- is still to be expected -- even though it will be at a slower pace than perhaps originally thought.

"Monetary policy divergence is likely to result in continued dollar appreciation. Widening interest rate differentials lie at the heart of our forecast of further dollar appreciation, especially via the euro and the yen," said chief economist at Goldman Sachs, Jan Hatzius in a note published Thursday.

As well as the timing and pace of rates in the U.S., the European Central Bank have also signaled they are willing to expand its quantitative easing program in December and possibly cut the deposit rate, which should also prove supportive for the dollar longer term.

"Even if the Fed did nothing , the European Central Bank is potentially cutting interest rates next month," said Foley who expects to see euro dollar at $1.05 on a one to three month view, while parity "might be a little bit more of a slow grind".