Dollar Rallies on Heels of Fed Minutes

The U.S. dollar rose across the board overnight as investors looked to yesterday’s minutes from the most recent Fed meeting as a clear indication that further policy stimulus looks unlikely. The dollar had fallen over the past two weeks after Fed Chairman Bernanke sounded a surprisingly cautious tone on the economy and hinted that the recent uptick in data may not be sustained if policy stimulus is removed prematurely. The minutes from the Fed’s mid-March meeting however showed a that only two out of the 10 policymakers on the FOMC board were in favor of additional policy support for the economy. On balance, the minutes suggested that the improving pace of recovery should limit the risk of additional dollar-negative easing, which boosted Treasury bond yields and improved the appeal of dollar assets for global investors. A solid jobs number on Friday would further that notion and likely see the greenback add to its impressive overnight gains.      

The euro slipped to a two-week low against the broadly stronger U.S. dollar overnight. In addition to the less dovish than expected Fed minutes yesterday, the euro suffered following a bond auction in Spain, which was met with relatively strong investor demand but saw yields rise on worries about the nation’s ability to bring down its deficit. The ECB expectedly left its key lending rate unchanged this morning, with investors focused on the post-Governing Council press conference later this morning. While the ECB may flag rising price pressures in the euro zone, it is also like to remain cautious given the very weak growth data of late. An overly cautious ECB would keep the euro biased broadly lower.  

The pound was supported by a strong construction sector PMI report, which capped a week of relatively solid PMI reports in the U.K. The data suggests a lower risk of recession in the U.K., which should ultimately help limit the pound’s downside against the dollar.  

USD: The greenback rose to a two-week high against a basket of its major rivals overnight, broadly supported by yesterday’s minutes from the Fed’s mid-March meeting. The minutes showed a Fed that was largely biased towards no further policy stimulus unless economic conditions worsen considerably. The view that QE3 (another round of Fed asset purchases) is largely off of the table helped push U.S. Treasury yields higher and improved the relative appeal of U.S. dollar-denominated assets. The minutes also suggested that Fed Chairman Bernanke’s comments last week, which sent the dollar broadly lower, were not an indication that the Fed is leaning toward more policy stimulus for the economy. This morning, ADP, America’s largest payroll processer, reported an increase of 209,000 new private sector jobs last month and an upward revision to February’s figures. While largely in-line with forecasts, the data is consistent with the moderating risk of additional Fed stimulus and as such, should be positive for the dollar.  

GBP: The pound hit a two-week high against the broadly weaker euro while its losses against the resurgent dollar were limited by another strong PMI report overnight. The U.K.’s construction sector expanded at a faster rate than expected in March, data which followed better than expected performance in the nation’s factory and services sectors last month. The figures suggest a lower risk or recession and additional BOE policy stimulus in the months ahead and should help limit the pound’s downside against the greenback.

AUD: The Aussie tumbled to an 11-week low overnight following data that showed the nation posted an A$480 million dollar deficit in February, confounding expectations for a A$1 billion surplus. The data fans concerns about slowing growth in China putting downward pressure on Australia’s key commodity exports and is consistent with the RBA’s recent warning that addition policy easing may be needed, especially if upcoming inflation data suggests that price pressures are not on the rise. The improving yield appeal of the greenback relative to the Aussie remains a key risk for AUD/USD, and should keep the pair pressured.   

EUR: The euro slipped to a three-week trough against the greenback following yesterday’s Fed meeting minutes from Mid-March. Overnight, bond auctions in Spain and Portugal saw surprisingly solid demand for peripheral debt but at rising yields, a sign of continued concerns about nations’ ability to bring down deficits. So far, in his post-Governing Council press conference, the ECB’s President has sounded a relatively cautious tone. President Mario Draghi seems to be highlighting a relatively balanced inflation outlook with still elevated risks to growth in the euro zone. His somewhat cautious tone contrasts an improving outlook from the Fed.  

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