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Fed’s Concern over Currency Weakens US Dollar

us dollarWithin minutes of the Feds admitting at the Federal Open Market Committee meeting there were concerns of a strong currency hurting US growth, the dollar fell. In comparison, the Euro matched gains against the Yen.

Value of the US dollar dropped against the Euro, which rose from $1.2657 to $1.2741 immediately prior to the minutes being released but also increased 0.6% in late day trading. Also ahead of the minutes, the US dollar dropped to 108.11 yen down from ¥108.72, cutting back earlier gains while leaving the dollar up 0.1% for the full day of trading.

In recent months, the dollar experienced gains against competing currencies based on Federal Reserve expectations being on course to increase interest rates for the first time since 2006. In the meantime, both the Eurozone and Japan face challenges associated with deflation.

The WSJ Dollar Index, responsible for tracking the US dollar against several other currencies, saw an increase of almost 5% for the year 2014.

During the September 16 and 17 meeting, Federal committee members discussed that a stronger dollar might be damaging to US exporters due to less competitive products. Other talks involved the dollar’s recent rally making imported goods more affordable and whether adding deflationary pressure would force consumer prices to stay under the Fed’s targeted 2%.

A highlight of the minutes involved the Feds’ belief of there being a negative economic impact on a strong dollar. This sentiment was emphasized by Camilla Sutton, Chief Currency Strategist at Scotiabank who stated there are limitations as to how strong the dollar can become before the economy is finally affected.

Also pointed out is that the Feds will need to show patience while monitoring US data in an effort to determine when the economy is healthy enough to sustain a jump in interest rates. Sutton added that the dollar becomes more attractive with higher US rates, as returns on assets denominated in the currency increase.

Initial market expectations consisted of the Feds executing rate hikes by July of 2015, which have now been pushed to August but with focus on data dependency, the rate increase will probably happen sooner than later.

The committee meeting occurred prior to September’s hearty job numbers being released, a time when the rate of unemployment declined to 5.9% and came close to hitting levels before the economic crisis.

Market numbers should help keep market expectations on track for a mid-2015 interest rate increase thanks to the better-than-anticipated labor market numbers, this according to Vassili Serebriakov, Currency Strategist at BNP Paribas.

Serebriakov also stated there has been some profit on this week’s long-dollar positions and that the minutes should serve to encourage more of that although investors will probably not alter their long-term views of the US dollar.

Noted by investors is the fact that an obvious variation between monetary policy and economic data in the US, as well as the Eurozone and Japan, favor the dollar.

The Fed’s bond-buying program will begin to slow down this month based on improvement of economic numbers. Also weighing on the US dollar is the program that flooded the market with easy money in an effort to rejuvenate the economy after the most recent financial crisis.

Both the European Central Bank and the Bank of Japan are now thinking about additional measures as a way to stimulate their own country’s economy but also boost inflation.

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