Dollar Pares Gains After Fed Minutes Reveal Balance-Sheet Divide

  • FOMC notes showed officials split on timing of normalization
  • Dollar gave up earlier gains against most of G-10 peers

Reading Between the Fed's Lines

The dollar pared gains to trade little changed after Federal Reserve minutes left the timing of balance-sheet normalization uncertain and still suggested the central bank plans to maintain gradual rate hikes.

The greenback was mixed versus G-10 peers and gained against most emerging currency markets. It pared gains as Treasuries rallied amid little sign of urgency in the Fed’s time line for beginning its balance-sheet adjustment. Still-firm rates kept emerging market FX defensive and added to weakness derived from domestic considerations for some pairs, including the South Africa rand. With FOMC minutes out of the way, focus will turn to Thursday’s ADP data release and Friday’s jobs report.

  • The Fed minutes noted that financial conditions have eased despite tighter policy; the Bloomberg dollar index was nursing gains of ~0.1% after advancing more than 0.3% earlier in the day
    • “The FOMC shows growing unease that broader financial conditions have not responded to recent interest rates increases,” said Niall Coffey, chief investment officer at Avoca Global Advisors LLC. “In our view, this is likely to embolden the FOMC leadership to move forward with further policy normalization this year”
  • Earlier, the South African rand dropped the most since May 18 after the ruling ANC party proposed that the nation’s central bank become wholly state-owned and as the country’s president advanced the notion that land expropriation is permitted under existing laws
  • WTI crude oil fell more than 4 percent after Russia dashed hopes for further production cuts. Commodity-sensitive Canadian and Australian dollars fell, as did the Mexican peso
  • USD/JPY fell to 113.17, relinquishing gains that saw the pair trade to 113.69 in European hours and hold close to that level into mid-morning. Earlier, USD/JPY had risen to its highest since mid-May amid demand for EUR/JPY and other crosses as the Japanese currency weathered choppy trading conditions that emerged after North Korea launched an intercontinental ballistic missile Tuesday
  • USD is expected to find light supply at 114.00, traders in Asia and Europe said; bids are positioned below 112.70, said the traders, who asked not to be identified because they are not authorized to speak publicly. JPY gains on haven demand after the North Korean missile launch may have been counter-intuitive given the geographic proximity of the two countries, traders said
  • EUR/USD traded at ~1.1345 as it pared early losses that saw a drop to 1.1313 after European Central Bank governing council member Benoit Coeure said that policy makers had not begun discussions on tapering QE. Last week, the euro gained strongly after ECB President Draghi described the European economy in positive tones, leading traders and investors to move up expectations for tightening
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