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Dollar Continues Lower as Fed Disappoints

Posted by Joseph Trevisani on Aug 18, 2016 4:32:27 PM

The dollar dropped  to an almost a two month low against the euro and  the yen as yesterday's Fed minutes reinforced the market conviction that the Fed is unlikely to raise rates before the December meeting. 

The edited record of the central bank's July meeting portrayed the governors as divided on the primary policy topic-if and when to raise the Fed Funds rate, currently at 0.5 percent- for only the second time in a decade.  

The Fed did increase the benchmark rate 0.25 percent in December, at the time predicting four further hikes in 2016. But a collapse in global equities in January and February kept the FOMC on hold in the spring and weak job numbers in April and May has stymied the central bank since. 

Futures on Treasury securities list only a 20 percent chance that the Fed will increase the funds rate at next month's meeting despite several Fed officials talking up the possibility of a hike.  

New York Fed President William Dudley said that strong job creation reinforced his view that wages are starting to move higher.

However, Mr. Dudley has stated similar opinions in the past before FOMC meetings and the bank has not acted. Mr. Dudley is seen as a close ally of Chair Janet Yellen.  Atlanta Fed President Dennis Lockhart had made similar comments this week.

The U.S. currency dropped below 1.1300 against the euro and slid beneath 100 versus the yen for the first time since June 24th in Thursday trading.  

The greenback has shed more than five percent this year as inflation has stayed quiet with no sign of acceleration and the expectation for a rate increase has faded.

The Fed seems to have backed away from its earlier assessment that 'rate normalization' was an important policy goal, given other economic factors remaining equal.  That would have meant that the U.S. central bank would have been raising rates as all of the world's other major banks, the ECB, the Bank of England, the Bank of Japan and the PBOC were increasing their monetary stimulus as they sought to spur moribund growth or stave off recession.

Such a policy would have driven the dollar considerably higher, inhibiting U.S. exports and economic growth.  With  U.S. GDP  barely crawling at 1 percent for the past three quarters, it seems an unlikly risk for the Yellen Fed to take.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Chart: WWM Alpha Trader

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