Dollar Recovers Only Slightly After Cautious Fed Minutes

  • Fed’s Brainard says global outlook brightest in years
  • Oil price slumps after OPEC agreement, denting commodity FX

The U.S. dollar rose to a fresh high for the day as a more-than-3% decline in crude oil weighed on commodity-driven currencies, enabling the dollar to pare losses sustained in the prior session.

Trading flows were modest with many European trading centers closed for the Ascension Day holiday. Despite today’s bounce, the dollar has been unable to claw back Wednesday’s losses after minutes of the Federal Reserve’s May 3 policy meeting injected an air of caution into the outlook for U.S. interest rates.

  • While the FOMC minutes said that most officials judged “it would soon be appropriate” to tighten rates again, supporting odds of a June hike, discussion that “it would be prudent” to ensure that evidence confirms the transitory nature of the 1Q slowdown may throw some doubt into the timing of further hikes, traders said. In comments Thursday, Fed Gov. Lael Brainard struck an upbeat note, saying that the global economic outlook is the brightest in years
  • Meanwhile, remarks by ECB President Draghi on Wednesday underscored the likelihood that ECB policy will remain on its familiar path until the end of 2017, keeping U.S. and European yield differentials relatively steady
  • With the degree of uncertainty at the FOMC, traders said the May U.S. employment report due next week may take on extra importance in tipping the scales toward or away from a possible rate hike when policy makers meet June 14. Non-farm payrolls are forecast to have risen 177k in May vs a gain of 211k in April, while the unemployment rate is expected to hold steady at 4.4%. With the outlook for U.S. fiscal stimulus and tax reform looking less certain in its timing, any shift in monetary policy expectations fueled by the jobs report may have significant impact on the dollar
  • In Thursday trading, the dollar was higher vs nine of its G-10 peers with strongest gains against resource-sensitive currencies as crude oil and other commodities declined after OPEC agreed to continue output curbs for a further nine months, as expected. WTI crude oil fell ~$2.60 to a low of $48.75 after the OPEC decision, before paring its loss
  • EUR/USD trading ~1.1200 paring a recovery from a shallow dip to a session low at 1.1194 seen at the start of U.S. trading. Bids to buy euro positioned under 1.1160, below Wednesday’s low, may cushion further losses. Euro was capped overnight at 1.1250 with offers positioned above 1.1260, close to the post-election high for the shared currency
  • USD/JPY was trading at ~111.85 and close to a fractional new high at 111.95 set recently as the 10Y UST yield reached a fresh high for the day. Offers to sell USD/JPY are layered above 112.00 and extend to 112.15 and beyond, traders in Asia and Europe said
  • USD/CAD rose to fresh high 1.3479 in afternoon trading as the loonie was weighed by the decline in WTI; USD testing offers positioned near technical resistance at the 55-DMA 1.3481 that extend to 1.3500
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