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Forex Flash: US dollar strengthens following FOMC minutes - BTMU

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that USD has continued to strengthen in the Asian trading session following the release of the latest less dovish than expected FOMC minutes, with the dollar index rising above its 200-day moving average.

He feels that the FOMC minutes have served to reduce investor expectations over both the duration and size of purchases that are likely to be completed during the Fed’s open-ended quantitative easing programme supporting the US dollar and weighing upon liquidity-driven risk assets. The minutes revealed that the “many” Fed officials are becoming “concerned about the costs and risks of further asset purchases”. Further, he comments that “A number of participants” also noted that such concerns could prompt the Fed to begin reducing the size of monthly asset purchases or even end the programme before it judged that a substantial improvement in the labour market had occurred.

Hardman sees that the FOMC has asked Fed staff for additional analysis ahead of future meetings to
support their ongoing assessment of the asset purchase programme. However, some members expressed concern that paring back monetary easing could prompt a potential spike higher in interest rates. As a way to offset such a risk he writes, “a number of participants discussed providing monetary accommodation by holding securities for a longer period than envisioned in the Committee’s exit principles…either to supplement or replace asset purchases”.

Overall, he notes that the minutes support his view that the feb will begin to scale back asset purchases in the second half of 2013, thus supporting his stronger 6 and 12 month USD forecasts. he writes, “The US dollar is continuing to prove resilient to the Fed’s QE3 programme even as global investor risk sentiment has improved markedly. The Fed’s trade-weighted US dollar index against other major currencies has strengthened by around 3.0% since the programme was introduced on the 13th September. It raises the question; why is the US dollar holding up so well? The initial reasons why we thought that the negative impact of QE3 upon the US dollar might prove more modest than QE1 and QE2 appear to be proving correct.”

He notes that firstly, the divergence in monetary policy between the Fed and other major central banks is not as wide as they too are still easing policy or remain far from tightening policy. Secondly, the ongoing rebound in global growth is still proving very gradual. Hardman finishes by writing, “The US dollar is also likely still benefiting from the recent crisis of confidence in the euro which will take more time to fully restore. A further reason has also recently emerged as other major countries have more actively attempted to weaken their domestic currencies, which is providing an offset to the Fed’s attempts to weaken the US dollar.”

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