Wednesday, 23 August, 2017

Dollar Pares Weekly Drop as Market Acknowledges FOMC Optimism

Traders work in front of the German share price index DAX board at the stock exchange in Frankfurt Traders work in front of the German share price index DAX board at the stock exchange in Frankfurt Germany
Juana Turner | 18 June, 2017, 00:43

The rupee opened 13 paise down at 64.66 against dollar on Friday on account of selling of American currency by banks and exporters.

The U.S. yield curve flattened, with the difference between short-dated two-year Treasury yields and benchmark 10-year yields narrowing to a difference of 78.58 basis points US2US10=RR, the smallest since September 9."It just looks like the Fed is sticking to their story and the market remains highly skeptical that the Fed is going to be able to deliver just based upon underlying data". While gross domestic product grew a lower-than-expected 0.5 percent in the first quarter, manufacturing production rose 1 percent and was 2.1 percent higher than a year earlier, with transport equipment, machinery and equipment manufacturing the biggest contributor to the sector. Year-on-year, retail sales increased by 0.9% last month, compared to forecasts for a 1.7% rise.

The dollar index fell on Wednesday to its lowest level since October 2016 after a slew of disappointing data: consumer prices fell more than expected and retail sales disappointed in May. Global currency volatility approaches the record lows seen during the summer of 2014 and with major central banks on hold, it may take a black swan event to unfold for it to rebound convincingly.

"This does seem like a more hawkish statement: the Fed announcing an update to their reinvestment principles leaves September open to the start of balance sheet runoff", said Gennadiy Goldberg, interest rate strategist at TD Securities, in NY.

Germany's final May inflation stats met expectations, dropping from 0% to -0.2% month-on-month and drop 2% to 1.5% year-on-year.

On Wednesday, the Federal Reserve lifted interest rates for the second time this year by 25 basis points to between 1 and 1.25%, as expected, with Chair Janet Yellen reiterating that inflation is expected to return to target and forecasting one more hike this year.

"With many market participants anxious about a dovish outlook, a surprisingly hawkish one could catch some investors off guard", she said.

The so-called core CPI, which strips out food and energy costs, rose 0.1 percent in May after a similar gain in April as rents continued to increase moderately.

Charles Melchreit of Pioneer Investments says markets may be finding it "a bit of a comforting outcome", that the Fed isn't willing to shift the rate hike path it has set out that quickly, even if current inflation numbers aren't backing it up.

If inflation comes in lower than projections, the Euro Australian Dollar exchange rate is likely to continue falling towards the end of the week.

The dollar fell to a seven-month low against a basket of currencies on the data, before retracing some of the losses.

Economists polled by Reuters overwhelmingly see the us central bank hiking its benchmark rate to a target range of 1.00 to 1.25 percent this week, though expectations for further rate increases are fading.

USD/JPY rallied 0.99% to 110.68, while USD/CHF gained 0.47% to 0.9756.

"What investors want to know most is the pace of rate hikes going forward", said Ayako Sera, senior market economist at Sumitomo Mitsui Trust in Tokyo.

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