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U.S. Dollar Sinks on Dovish FOMC Minutes

U.S. Dollar Sinks on Dovish FOMC Minutes

2011-08-30 18:41:00
Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY: FOMC Minutes from August Meeting > Dovish Undertone > USD Falls

The U.S. Dollar experienced moderate price action in Tuesday’s afternoon segment of the North American session after the Federal Reserve released the minutes from the Federal Open Market Committee’s meeting on August 9.

EUR/USD 1-minute Chart: August 30, 2011

U.S._Dollar_Sinks_on_Dovish_FOMC_Minutes_body_Picture_7.png, U.S. Dollar Sinks on Dovish FOMC Minutes

Charts created using Strategy Trader– Prepared by Christopher Vecchio

In particular, the Greenback faced the biggest headwinds against the Australian Dollar, the Euro and the New Zealand Dollar, dropping by approximately 30-pips against each currency. The Euro continued to climb off of its session lows, set at the start of European trading, as European policymakers, from European Central Bank President Jean-Claude Trichet to International Monetary Fund Chief Christine Lagarde offered differing views on the health of European financial institutions over the past few days.

USD/CHF 1-minute Chart: August 30, 2011

U.S._Dollar_Sinks_on_Dovish_FOMC_Minutes_body_Picture_10.png, U.S. Dollar Sinks on Dovish FOMC Minutes

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Also exhibiting an interesting reaction to the news was the USD/CHF pair. While some of the other pairs, such as the AUD/USD and EUR/USD continued to climb higher against the Greenback in the wake of the news, the Franc’s gains were seemingly cut short, even though it gained approximately 30-pips as well against the U.S. Dollar at its apex. It’s clear that investors remain timid at best in entering positions in favor of the Swiss Franc, given the Swiss National Bank’s sharp rhetoric in recent days and weeks to tame what had been the strongest currency since the inception of the second round of quantitative easing last November.

Overall, the minutes closely resembled the points that Federal Reserve Chairman Ben Bernanke outlined at the Jackson Hole Economic Policy Symposium on Friday, which was expected considering economic conditions were little changed over the two-plus week span in between the FOMC meeting and the conclave in Jackson Hole, Wyoming.

Still, various points were made at the FOMC meeting on August 9 worth reiterating, now that it is has been made public that the Federal Reserve will host a two-day meeting in September, in order to further discuss potential policy options on the table. Presented below are key points contained within the minutes:

  • FOMC discussed additional asset-buying, shifting maturities on obligations, and changing the rate on reserves.
  • Discussion included whether or not to specify an inflation target as well as an unemployment target.
  • FOMC noted “range of policy tools” still available to combat slowdown, economic uncertainty.
  • Economy remains “vulnerable to adverse shocks,” though the banking sector strengthened “in recent quarters.”
  • Inflation is “generally” expected to moderate somewhat over the coming periods.
  • The housing market “remained depressed.”
  • During the period between meetings, “U.S. financial markets were strongly influenced by developments regarding the fiscal situations in the United States and in Europe,” as well as “generally weaker-than-expected readings on economic activity.”
  • FOMC projection for inflation is raised for the second half of 2011, and still expects “some rebound in economic activity in the near-term.”

As noted at Jackson Hole, the Federal Reserve’s policymakers are becoming increasingly dovish in their tone, as noted by their view of higher inflation but no desire for tightening, as well as a drop in the headline gross domestic product figure in the coming periods. The confirmation of a shift towards a more dovish tone by the FOMC, coupled with dovish remarks by the Federal Reserve’s Charles Evans and Narayana Kocherlakota on Tuesday have dragged on the U.S. Dollar for a large portion of the North American session, a trend that could carry over into Asian trading on Wednesday.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

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