Dollar grinding higher

Another quiet trading session saw the dollar grind higher yesterday. The highlight of today’s session will be the release of the Fed minutes. It seems too early for the Fed to countenance easing - suggesting the dollar will hold recent gains.

USD: FOMC minutes in focus

Both the US dollar and US yields are recovering from the losses experienced during the US regional banking crisis in March. It appears that the debt ceiling threat is only posing a temporary risk to the markets, while the primary focus remains on the performance of US economic activity and prices. This raises questions about whether the Federal Reserve truly needs to implement any interest rate cuts later this year (as they already mention that they won’t be doing this). The release of the FOMC minutes this morning will shaded light on this ongoing debate and will have impact once the NY session begins. Like central bankers worldwide, the Fed's greatest challenge is managing inflation. Therefore, emphasizing a pause or potential future easing may not yield significant benefits.

Additionally, with emerging market currencies, such as USD/CNH, facing downward pressure (with the exchange rate trading at 7.06), I anticipate that this correction in the US dollar may continue for a little longer. Consequently, we should prepare for the possibility of the US dollar gaining strength following the publication of the FOMC minutes on this morning.

EUR: Softer trends

The Euro appears to be slightly weaker across the board this week. Tuesday’s release revealed that May's flash PMIs were on the softer side, but inflation in the service sector remained resilient, which could be a cause for concern for the European Central Bank (ECB). As mentioned earlier, I believe that this correction in the US dollar may continue for a bit longer, and if the Federal Reserve does not downplay the possibility of future rate hikes, it could result in EUR/USD trading down to the 1.0700 area.

In New Zealand, the Reserve Bank of New Zealand (RBNZ) surprised the markets with a dovish 25 basis points hike. Many analysts, including me, had anticipated that the RBNZ would signal further hikes in its new rate projections, given the recent government spending boost, upward revision in growth forecasts, and rising migration. However, the RBNZ expressed uncertainty about the impact of rising net migration on inflation and expected the effects of government spending to be spread over more than one year. Considering the evidence of a slowing economy, the impact of already restrictive monetary policy, a struggling housing market, and lower-than-expected Consumer Price Index (CPI) figures, the RBNZ decided to hike rates by 25 basis points yesterday. The decision was a close one, with a five to two vote split, and rate projections indicate that this marks the peak of the tightening cycle in New Zealand. Following the announcement, NZD/USD experienced a sharp decline, trading below 0.6200, and if USD momentum remains strong, it may test numbers below 0.6100 by the end of the week.

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