Friday, 24 March, 2017

Dollar gains on hawkish Fed comments, European political risk

Graphic courtesy of Casey Research Graphic courtesy of Casey Research
Preston Stone | 24 February, 2017, 00:17

In minutes from the central bank's most recent policy meeting, released Wednesday, the central bank sounded decidedly more dovish than recent commentary from Fed Chairwoman Janet Yellen and a bevy of other Fed officials would suggest, market strategists said.

Fed officials also see "heightened uncertainty" from the Trump administration's plans for tax cuts and spending increases, the minutes show.

The Fed in December boosted its key rate by a modest quarter-point to a new range of 0.5 percent to 0.75 percent. Median forecasts show Fed officials expect to hike rates three times this year. Ultralow interest rates have fueled a multiyear global stock rally and the prospect of higher US interest rates has lifted the dollar and made the USA still more attractive than other markets for investors.

But not everyone thinks "fairly soon" means a March move. And they predicted that the expected increase in economic growth related to Trump's policy proposals could push the Fed into action.

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The single European currency has suffered recently on investor worries about European politics, particularly the performance in opinion polls of French anti-euro, far-right party leader Marine Le Pen before presidential elections in April and May.

Fed policy makers also seemed unhappy that investors now regard them as a paper tiger given that they've only raised rates twice in two years. When the market made its assessment as to the balance of this report, the US Dollar dropped alongside bond yields in the aftermath of the release. If inflation and employment data for this month are "in line with the recent trends, the Fed may have no excuses to hold off". Their next policy meeting is mid-March. Euro/sterling closed below its 200-day moving average, a long-term gauge watched closely by fund managers, on Tuesday for the first time since December 2015.

"Participants again emphasized their considerable uncertainty about the prospects for changes in fiscal and other government policies as well as about the timing and magnitude of the net effects of such changes on economic activity", said the minutes. A big concern for officials: uncertainty over President Trump's proposed economic policies.

"As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession", she said.

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