Dollar Plummets Following FOMC Minutes, Can Anything Save the Heavily Sold Currency?

The euro easily set fresh record-highs on the renewed wave of dollar selling, trading above the psychologically significant $1.4800 mark through the New York afternoon. Strong euro interest sent the single currency to four-year peaks against the British Pound, with the UK currency continuing to underperform major forex counterparts. The Japanese Yen and the Canadian dollar were the only G-10 currencies to remain even with the dollar, likewise falling significantly against key European currencies. 

The afternoon release of Federal Open Market Committee minutes from the board’s October 31 meeting was the clear highlight of the day’s trade, and dollar selling accelerated on renewed bearishness on US economic growth prospects. The Federal Open Market Committee struck a somewhat hawkish tone in minutes from their October 31 meeting, with some officials saying that rate cuts could be reversed "readily". Indeed, the text said that officials viewed the rate cut as a "close call", but likewise noted that growth outlook remains more uncertain than that of inflation. Though the Fed claimed it saw little evidence of a clear spillover of the housing market recession to the broader economy, it revised 2008 growth forecasts to a mere 1.8%-2.5% from 2.5%-2.75% previously. The FOMC likewise claimed that financial markets remained "fragile" through its October 31 meeting, and a further deterioration through more recent trading emphasizes the risks to growth on financial market conditions.

The minutes present relatively little in the way of new developments, but it remains relatively clear that Fed officials were reluctant to cut rates aggressively as of their previous meeting. This may change, however, as credit and lending market conditions continue to worsen and risks to growth intensify. Markets have responded by sending short-term market yields lower in the wake of the result, but it is interesting to note that Fed Funds Futures have pulled back rate cut expectations through the Fed's December 11 meeting. Traders remain relatively indecisive following the release, and it seems as though the Fed may face an uphill battle ahead of their upcoming rate decision.

The Dow Jones Industrial Average fell further in the wake of the report, completely erasing its initial 100+ point rally and trading 87 points off to 12,870. The NASAQ Composite showed over twice the percentage decline, tumbling 1.4 percent to 2,557. All the while, the S&P 500 shed 0.8 percent to 1,421. Momentum clearly remains to the downside for recently downtrodden US equity markets. Yet the dollar has failed to gain as a safe haven currency on increased uncertainty over the future of domestic economic growth.

Treasury markets were quite surprisingly stable in the wake of the FOMC minutes, and the 2-year Note yield remained almost exactly unchanged at 3.15 percent.

Written by David Rodríguez, Currency Analyst for DailyFX.com