The U.S. dollar rose to a new 10-month high against a basket of its major rivals overnight, benefiting broadly from the idea that the Federal Reserve may be inching closer to an exit from its very accommodative monetary policy. Late yesterday, San Francisco Fed President John Williams said the central bank could completely wind down its quantitative easing program by the end of the year. While Mr. Williams is not currently a voting member of the FOMC, he has historically been a policy dove, which makes his seeming shift to a more hawkish policy stance more significant. If other Fed policymakers are also becoming increasingly concerned with the potentially disruptive side-effects of the bank’s asset purchase program, it would suggest a higher chance that the Fed begins to normalize policy sooner rather than later.  

The euro fell to a new six-week low against the broadly stronger U.S. dollar overnight. A recent string of disappointing euro zone economic data, including reports that highlighted the bloc’s longest recession ever, a record high level on unemployment and a three-year low for inflation have all made additional monetary easing by the ECB more likely. In contrast, investors see a growing probability that the Fed begins to wind down its monetary easing later this year. Talk that the ECB is laying the groundwork for a shift to negative deposit rates continues to weigh on the single currency as well.    

The yen remained stuck near a four and a half-year low overnight. While U.S. data this week has been somewhat mixed, falling bond yields in Japan have added to the yield advantage of U.S. Treasuries over JGB’s. The massive fiscal and monetary easing policies of the Japanese government and the Bank of Japan should keep the yen biased broadly lower.      

The Aussie and kiwi dollars continued their downward spiral against the greenback, falling to multi-month lows overnight.

USD: The U.S. dollar rose to a new 10-month trade-weighted high overnight. The greenback’s broad rally continues to be largely driven by expectations that the Federal Reserve will begin to wind down its $85 billion in monthly asset purchases later this year. Late yesterday, San Francisco Federal Reserve President John Williams, a known policy dove, said he could see the Fed exiting its quantities easing program completely by the end of the year. He noted an improving labor market and expected that growth would likely gain further traction in 2014. His comments were significant because Mr. Williams is seen as an influential Fed member and his shift to a more hawkish stance could mean that a broader consensus against the central bank’s quantitative easing program is growing. Fed officials have expressed increasing concern over the unintended consequences of the bank’s massive asset purchase program. All eyes will shift to Fed Chairman Ben Bernanke’s speech tomorrow for further clues on the outlook for the economy and monetary policy. Hints from Mr. Bernanke that he too is leaning towards winding down QE later this year would add to the dollar’s broad strength.  

EUR: The euro fell to a new six-week low against the dollar this morning as the increasing talk of a Fed exit from quantitative easing continued to contrast expectations for more policy support from the ECB. Recent data have highlighted the miserable economic backdrop across the euro zone that will likely force the ECB to cut rate again and possibly adopt some unconventional easing measures as well. Various ECB officials have floated the idea of negative deposit rates as a way to encourage bank lending and investment. While debt crisis worries have largely subsided, the euro remains undermined by the diverging growth outlook between the euro zone and the U.S.  

JPY: The yen fell back toward a four and a half-year low against the broadly stronger U.S. dollar overnight. Japan’s Prime Minister, Shinzo Abe, highlighted the third arrow in his quiver of “Abenomics”, which includes boosting the nation’s infrastructure and farm exports, massive BOJ monetary easing and a big boost in government spending. The prospect of massive fiscal and monetary easing in Japan should continue to keep the yen biased broadly lower.  

AUD: The Aussie plummeted to a new 11-month low while its antipodean neighbor the kiwi, fell to a new six-month trough. Worries about Chinese growth, lower commodity prices and increasing concern from the RBA and RBNZ about the strength of their currencies continue to weigh on the pair.   

CAD: The loonie fell to a new two-month low after data this morning showed CPI fell to just 0.4%(y/y) in April from 1.0%(y/y) in March, its lowest since October 2009.