Fed minutes weigh heavily on dollar

Fed minutes weigh heavily on dollar

By Peter Garnham

The dollar fell to record lows against the euro and Swiss franc on Wednesday as investors digested the newly released minutes of the Federal Reserve’s October meeting.

These showed that the central bank remained concerned both about the risks of a sharper growth slowdown as well as a pick-up in inflation. The bank also saw the October interest rate cut as a “close call”.

“Although the minutes probably had the intention of conveying the message that further interest rate cuts are far from certain, this was ignored by the market,” said Geoffrey Yu at UBS.

“Fed forecasts, which for the first time accompanied the minutes, clearly showed the economy was on a downtrend and lower yields were immediately priced in, hurting the dollar as a result.”

The dollar fell as low as $1.4856 against the euro and SFr1.1025 against the Swiss franc. It hit Y108.27 against the Japanese yen, its weakest level since May 2005.

The dollar later recouped some of its losses to stand 0.2 per cent lower at $1.4790 against the euro by midday in New York, down 0.3 per cent at SFr1.1040 against the Swiss franc and 1.4 per cent lower at Y108.50 against the yen.

The yen also soared against other currencies as sliding equity markets saw investors shy away from risky carry trades, in which the low-yielding Japanese unit is sold to fund the purchase of riskier, higher-yielding assets.

The yen rose 1.8 per cent to Y160.10 against the euro and jumped 3.7 per cent to Y94.21 and 3 per cent to Y81.49, respectively, against the higher-yielding Australian and New Zealand dollars.

Hans Redeker at BNP Paribas said equity investors had been disappointed by the Fed minutes, which showed a central bank that downgraded its growth forecasts but was unwilling to ease interest rates.

“The minutes signalled that the Fed was no longer pre-emptive,” he said. “With this, equity markets are likely to face further selling pressure, suggesting the yen is set to break higher.”

The pound fell to its lowest level in 4½ years against the euro and lost ground across the board after minutes from the Bank of England’s November meeting showed two of its nine-strong monetary policy committee voted for a cut in UK interest rates.

Analysts expressed surprise that John Gieve, the central bank’s normally hawkish deputy governor ,ad joined with David Blanchflower, who was alone in voting for a cut in rates at the October meeting.

Chiara Corsa at UniCredit said the central bank could move to cut interest rates as early as next month.

The pound fell 0.5 per cent to 0.7211 against the euro, its weakest level since May 2003, lost 0.5 per cent to $2.0550 against the dollar and dropped 1.8 per cent to Y222.95 against the yen.

From: FT.com