Another Week Of Dollar Weakness Despite Hawkish Fed Minutes

Renewed rate cut hopes dragged the U.S. Dollar lower during the week ended November 24, notwithstanding a hawkish tone in the Fed minutes released on Tuesday. The dollar extended losses against the euro, the British pound, the Australian dollar as well as the Japanese yen albeit at a slower pace as investors held on to bets that Federal Reserve’s rates had peaked.

The Dollar Index, a measure of the Dollar’s strength against a basket of 6 currencies slipped 0.50 percent during the week spanning November 20-24. Though the DXY slipped from the previous week’s closing level of 103.92 to 103.18 on Tuesday, it rebounded to 104.21 on Wednesday helped by the hawkish tone in the FOMC minutes. The minutes of the FOMC released on Tuesday revealed an intent to keep the stance of monetary policy sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time.

Nevertheless, the committee converged on the view that further tightening of monetary policy would be appropriate only if incoming information indicated that progress toward the Committee’s inflation objective was insufficient. The Committee also agreed to proceed carefully and to base policy decisions on the totality of incoming information, considering the implications for the economic outlook as well as the balance of risks.

Despite the aggressive monetary policy stance, the softer-than-expected inflation and labor market data released recently weighed on market sentiment. The more-than-expected decline in durable goods orders and the lower-than-expected initial jobless claims added to the uncertainty about the Fed’s monetary policy trajectory. Dollar Index’s gains were therefore short-lived, and the Index eventually closed the week at 103.40, shedding a little over half a percent.

The EUR/USD pair gained 0.29 percent during the week ended November 24, closing at 1.0939, versus 1.0907 a week earlier. The pair ranged between a high of 1.0965 and a low of 1.0852 even as the European Central Bank refused to declare victory over inflation.

The pound surged strongly against the U.S. Dollar amidst hawkish commentary by Bank of England Governor. Andrew Bailey had on Monday said that it was far too early to be thinking about rate cuts. The GBP/USD pair rallied to 1.2603, from 1.2461 a week earlier, recording gains of 1.14 percent. The weekly trading range was between 1.2617 and 1.2445 while the pair touched a 12-week peak.

The Australian Dollar too recorded strong gains against the U.S. Dollar during the past week amidst concerns about sticky inflation raised by the Reserve Bank of Australia Governor Michele Bullock. The AUD/USD pair gained 1.14 percent, rising to 0.6582, from 0.6508 a week earlier. The pair’s trading range was slightly wider, between 0.6500 and 0.6592. Minutes of the recent RBA meeting released on Monday that showed an intense focus on inflation as well as optimism about more stimulus measures from China also supported the Australian Dollar’s strength.

The USD/JPY pair traded below the psychological 150 level for most part of the week helped by a falling Dollar. From the week’s high of 150.00 recorded on Monday, the pair dropped to 147.15 on Tuesday before recovering and closing Friday’s trade at 149.44. The pair had finished trading at 149.62 a week earlier. Data released on Thursday had shown annual inflation rate in Japan rising to 3.3 percent in October, from 3 percent in the prior month. The highest inflation reading since July also triggered speculation about Bank of Japan soon exiting the negative interest rates regime as well as the yield curve control.

Sentiment remains cautious as currency markets brace for a data heavy week. Second estimate of the third-quarter GDP is due from the U.S. on Wednesday whereas the Fed’s preferred PCE-based inflation readings are due on Thursday. Manufacturing PMI readings as well as a speech by Fed Chair Jerome Powell are also on the anvil.

Amidst anxiety ahead of the data-heavy week, the DXY has decreased to 103.24. The EUR/USD pair has increased to 1.0952 whereas the GBP/USD pair has firmed up to 1.2632. The AUD/USD pair has climbed up to 0.6610. The USD/JPY pair has dropped to 148.78.

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