Dollar gains after FOMC minutes ease concern over aggressive rate cut

Market Review - 21/08/2019 23:44GMT  

Dollar gains after FOMC minutes ease concern over aggressive rate cut

The greenback ended the day higher against its G4 peers on Wednesday after FOMC meeting minutes showed that although the Fed was divided on interest rate cut decision last month but were united that they are not on a path of more aggressive rate cuts together with strong rebound in U.S. Treasury yields and rise in U.S. equities. Sterling gave up Wednesday's gains and retreated on profit-taking due to lingering threat of no-deal Brexit.   
  
Reuters reported the Federal Reserve debated cutting interest rates more aggressively at its last meeting, although central bankers were united in wanting to avoid the appearance of being on a path to more rate cuts, records from the meeting showed.     
The U.S. central bank cut rates by 25 basis points at the close of its July 30-31 meeting, with minutes for the meeting published on Wednesday showing broad concern among policymakers over a global economic slowdown, trade tensions and sluggish inflation.  At  the same time, the policymakers agreed they did not want to give the impression they were planning more rate cuts.   The meeting also included discussion of the Fed's research into potential changes to its approach to setting policy. A number of policymakers said the Fed could have been more aggressive in using bond purchases to fight the 2007-09 recession.   However, policymakers also said tools like bond purchases and pledges about future policy might not be enough to eliminate the risk of policy being hampered in the future when the Fed's benchmark rate gets close to zero.   
  
Versus the Japanese yen, although dollar gained to 106.54 in Asia on broad-based selling in jpy, then higher to 106.59 in early European morning, price pared its gains and retreated to 106.36 in New York morning due partly to dovish comments from Fed's Kashkari but later rose to session highs at 106.64 after release of FOMC minutes together with rebound in U.S. yields and gains in U.S. stocks before easing.  
  
Reuters reported the U.S. Federal Reserve should use forward guidance now as the global economy is slowing down, the yield curve has inverted and investment in U.S. businesses has stalled, Minneapolis Federal Reserve Bank President Neel Kashkari wrote in an op-ed for the Financial Times. "Absent some surprise reversal in these economic developments, I will argue that we should not only cut the federal funds rate, but that we should also use forward guidance to provide even more of a boost to the economy than a rate cut alone can deliver", Kashkari wrote on Wednesday.  Kashkari does not have a vote on monetary policy this year but participates in policy discussions at the U.S. central bank.  
  
The single currency initially traded inside a narrow range as price dropped to 1.1089 in early European morning before rising to an intra-day high at 1.1107 ahead of New York open but only to fall to session lows of 1.1082 in New York afternoon on less dovish FOMC meeting minutes. The pair last traded at 1.1085 near the close.  
  
Although the British pound edged up to 1.2174 in Asian morning, cable met renewed selling there and knocked price down to 1.2118 ahead of New York open on cross-selling in sterling especially vs euro as concerns about a no-deal Brexit continued to weigh. Price then fell below this level to an intra-day low at 1.2112 and then rebounded to 1.2155 but retreated again to 1.2120 near New York close after FOMC released its latest meeting minutes.  
  
Reuters reported Germany is preparing for a no-deal Brexit although Berlin would still prefer an orderly British divorce from the European Union, a German government spokesman said on Wednesday before Prime Minister Boris Johnson meets Chancellor Angela Merkel.  "We have always said an orderly British withdrawal from the EU is preferable to a disorderly one but we live with realities and we must prepare for possible realities," said government spokesman Steffen Seibert.  For that reason, he added, intense activity on many levels was being put into making the necessary preparations on both a European and German level.  
  
In other news, Reuters reported President Donald Trump on Wednesday continued to pressure the Federal Reserve and the central bank's chairman to lower interest rates, saying its policies were hampering U.S. growth and reducing the country's ability to compete economically.    
"Doing great with China and other Trade Deals. The only problem we have is Jay Powell and the Fed. He's like a golfer who can't putt, has no touch. Big U.S. growth if he does the right thing, BIG CUT - but don't count on him!" Trump wrote on Twitter. "We are competing with many countries that have a far lower interest rate, and we should be lower than them," he added.  
  
On the data front, Reuters reported U.S. home sales rose more than expected in July, boosted by lower mortgage rates and a strong labor market, signs the Federal Reserve's shift toward lower interest rates was adding support for the economy.    
The National Association of Realtors said on Wednesday existing home sales rose 2.5% to a seasonally adjusted annual rate of 5.42 million units last month. July's sales pace was revised slightly higher to 5.29 million units from the previously reported 5.27 million units.  Economists polled by Reuters had forecast existing home sales would rise to a rate of 5.39 million units in July.  
  
Data to be released on Thursday:  
  
Australia manufacturing PMI, services PMI, Japan Nikkei manufacturing PMI, all industry activity index, Swiss industrial production, France Markit manufacturing PMI, Markit services PMI, Germany Markit manufacturing PMI, Markit services PMI, EU Markit manufacturing PMI, Markit services PMI, consumer confidence, UK CBI distributive trades, U.S. initial jobless claims, Markit manufacturing PMI, Markit services PMI, leading indicator, KC Fed manufacturing index, and Canada wholesales trade.