By Chelsey Dulaney

The dollar extended its rout Thursday, while the Chinese yuan headed for its biggest two-day gain ever in offshore markets.

The WSJ Dollar Index, which measures the U.S. currency against 16 others, fell 0.7%, to 92.36, retreating further from the 14-year-highs hit earlier in the week.

Analysts said minutes from the Federal Reserve's December meeting are weighing on the dollar. The Fed raised interest-rates at the meeting and signaled a more aggressive path of tightening this year.

Minutes released Wednesday showed some Fed officials remain cautious about thepath of the U.S. economy, citing pressures from higher long-term rates, a stronger dollar and uncertainty over Donald Trump's policy proposals.

"The general tone of the minutes read hawkish with the Fed emphasizing the strength in the labor market and playing up the scope for fiscal policy," said Mark McCormick, North American Head of FX Strategy at TD Securities. "Still, participants emphasized considerable uncertainty about the impact of future stimulus."

The Fed is projecting rates will rise three times this year. Investors currently see only a 36% chance of that happening, according to fed-funds futures, a popular derivative used to bet on central-bank policy tracked by CME Group.

A more dovish Fed would alleviate pressure on emerging-market economies, especially China. Higher U.S. rates typically boost the dollar but make emerging-market nations' dollar-denominated debts more expensive to pay back.

Concerns over higher U.S. rates have battered the Chinese yuan in recent months and ramped up pressure on Chinese authorities to stem capital outflows.

On Thursday, the Chinese yuan rose 0.9% against the dollar in offshore markets, on track for its biggest two-day gain since the currency began trading freely outside of mainland China in 2010.

Other emerging-market currencies also rallied, with the dollar falling 1.3% against the Korean won and 0.5% against the Malaysian ringgit. The dollar was down 0.7% against the Mexican peso after Mexico's central banks supported its currency by selling dollars.

Friday's U.S. jobs report will be an important test for the dollar. A report showing the labor market remains strong would bolster the Fed's case for raising rates, analysts said. Data this week has been mixed, with strong U.S. manufacturing and service-sector reports but weak private-sector hiring data.

Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com

(END) Dow Jones Newswires

January 05, 2017 11:11 ET (16:11 GMT)

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