Dollar Drops as Fed Cites Currency as Risk to Its Inflation Goal

  • Minutes show a `close call' in December interest-rate increase
  • Yen at 4-month high as North Korea test adds to China woes

FOMC: Almost All Fed Officials Agreed on Liftoff

The dollar fell after minutes from the U.S. Federal Reserve’s December meeting cited the strength of the greenback as a risk to the central bank’s objective of raising inflation toward its 2 percent goal.

The U.S. currency weakened against the euro and the yen after the Federal Open Market Committee minutes showed the central bank raised interest rates for the first time in almost a decade on a “close call” for some policy makers. The yen climbed to a four-month high against the dollar on concern China’s currency weakness reflects a slowing economy and as North Korea’s claim that it successfully tested its first hydrogen bomb added to demand for the safest assets.

"More and more, we see a certain level of discomfort among the Fed regarding the strength of the dollar," said Mazen Issa, senior foreign-exchange strategist at Toronto-Dominion Bank in New York.

The greenback declined 0.3 percent to $1.0781 per euro and lost 0.5 percent to 118.47 yen as of 5 p.m. in New York. The yen reached its strongest level against the U.S. currency since Aug. 24 on a closing basis.

Fed Policy

The 10 voting FOMC members decided unanimously three weeks ago to raise the benchmark federal funds rate target by a quarter percentage point to a range of 0.25 percent to 0.5 percent. The move marked the end of an era of near-zero rates dating back to December 2008.

"They tried hard to show their confident, but cautious, approach," said Robert Tipp, chief investment strategist in Newark, New Jersey, for Prudential Financial Inc.’s fixed-income division. He expects greenback to attract more buyers this week amid improving labor data and rising demand from investors for safe assets.

Before the Fed minutes were released, Vice Chairman Stanley Fischer said policy makers’ forecasts predicting four interest-rate increases in 2016 were “in the ballpark,” though China’s slowing economy and other sources of uncertainty make it difficult to predict the path of policy.

A gauge of the dollar reached an 11-year high after a private report showed U.S. companies added more workers than projected in December. Firms boosted payrolls by 257,000 last month, figures from the ADP Research Institute in Roseland, New Jersey, showed. That’s the biggest jump since December 2014. 

A Labor Department report Jan. 8 will probably show nonfarm payrolls rose by 200,000 last month, compared with 211,000 in November, according to a Bloomberg survey.

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