Dollar Approaches Key Support After Fed's Dovish Inflation View

  • Aussie extends gains on momentum buying, exporter capitulation
  • Fed’s tightening cycle is mature and fully priced, says CBA

State Street's Evans Says Fed Is in a Good Situation

The dollar extended its decline as traders in Asia joined the selloff after the U.S. Federal Reserve indicated that a period of weak inflation continues and left rates on hold.

The Bloomberg Dollar Spot Index, already at its lowest since May 2016, slipped 0.2 percent Thursday, toward the 1,150 support level. Clients are still getting on the trade against the greenback, with momentum funds adding to long positions on the Australian dollar, according to a sales trader who asked not to be identified as he isn’t authorized to speak publicly. Treasury yields fell across the curve.

“We continue to see further USD depreciation because the Fed’s tightening cycle is mature and fully priced, while other major central banks appear to be moving toward less monetary policy accommodation as their economies improve,” according to Richard Grace, chief currency strategist at the Commonwealth Bank of Australia in Sydney.

The Fed said Wednesday that inflation is running below 2 percent, and that it is monitoring developments closely. Inflation has missed the central bank’s target for most of the past five years. Its preferred price measure rose 1.4 percent for the 12-month period ended May.

  • BBDXY drops to as low as 1,155.07; oil slips 0.2%
    • “The market correctly took the view that highlighting weaker inflation and leaving the start date for balance sheet normalization open is a net negative for the dollar,” Macquarie Bank Ltd. strategists led by Nizam Idris write in a note. “FOMC was just the latest trigger. Political risk and the U.S. debt ceiling debate are likely to intensify over the next two months.”
  • AUD/USD rises 0.4% to 0.8035 versus 0.7992-0.8043 range
    • Initial importer selling taken out by momentum funds, and first evidence of larger mining exporters buying at recent levels, a trader says
    • 2Q export prices fall 5.7% q/q; est. 5.5% decline
    • 2Q import prices drop 0.1% q/q; est. 0.7% gain
    • Currency pair is approaching a 200-week moving average
  • USD/JPY down 0.2% to 110.94 under weight of macro and fix-related selling
    • Exporter offers layered above 111.50 into month end, according to a trader
  • EUR/USD gains 0.1% to 1.1746 ahead of large over-the-counter option barriers above 1.1750, high so far 1.1748
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