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Trump and Fed keep cap on the dollar

The dollar is stuck at the lows it reached on Wednesday on a cocktail of persistent political turmoil and caution from the Federal Reserve.

The dollar index, which tracks the currency’s value against a basket of peers, stumbled by 0.6 per cent from its peak yesterday, and it has edged a little lower again in early European trade, leaving it at 93.44. The decline chips away at what has been a rare bright spot for the buck.

The minutes of the latest Fed meeting, released on Wednesday, shows that some policymakers were prepared to announce a start date for the US central bank’s unwind of its crisis-era economic stimulus last month, but they were outnumbered by those who preferred to wait.

Differences of opinion on when to begin the shrinking of the Fed’s balance sheet, together with growing concern among some policymakers over low inflation, bolster the case against quick tightening.

Daiwa says the minutes were “arguably more noteworthy than usual”:

Perhaps surprisingly the minutes noted that “several” officials were already last month happy to announce the start date for adjusting the reinvestment policy. So, while most preferred to delay for a while, we should expect the FOMC to announce a start date for normalisation following the next meeting on 19-20 September, with kick-off in Q4 – subject to issues related to the debt ceiling being resolved – most likely.

However, from the markets’ perspective, what yesterday’s minutes had to suggest about the Fed’s heightening concerns about persistent sub-target inflation were most notable, and those concerns will not have dissipated after last week’s further downside surprise to CPI. For as long as that run persists, the FOMC will be in no hurry to raise rates.

Commerzbank, meanwhile, sees the scrapping of president Trump’s business councils as a drag on the buck:

The existence of these advisory teams had given rise to the hope that the US President would pursue pro-business politics. This hope has now faded somewhat. His now numerous targeted attacks on individual companies (most recently a large pharmaceutical company) instead gives the impression that he is abusing his position to interfere in the corporate decision making process. That of course would be anything but pro-business and therefore instead damaging for the US economy. That means it cannot be good news for the dollar.

At the same time the Fed is clearly not providing support for the US currency in this difficult time. On the contrary: the FOMC minutes yesterday illustrated as expected that the most contentious issue amongst the US central bankers is the development of inflation.