U.S. Dollar Index flat, as markets struggle to interpret Fed minutes
The U.S. Dollar Index inched down on Wednesday after the minutes from the Federal Reserve's July meeting depicted a committee sharply divided on the timing of its next interest rate hike, leaving markets confused on the U.S. central bank's direction in the coming months.
The index, which measures the strength of the greenback versus a basket of six other major currencies, remained stuck in a tight range between 94.49 and 95.08, before ending the U.S. afternoon session at 94.69, down 0.06% on the day.
At session-lows, the index fell to its lowest level since June 24. The index is on pace for its fourth straight loss and sixth losing session over the last seven trading days. When the Federal Open Market Committee (FOMC) last met on July 26-27, some members anticipated that economic conditions would soon warrant "taking another step in removing policy accommodation," the minutes showed.
It came as some participants judged that market conditions were close to reaching full employment, while most members noted that the rapid recovery of global financial markets in the wake of the Brexit decision provided encouraging signs on the resilience of markets worldwide.
In addition, several members expressed concern that holding rates at persistently low levels could prompt investors to search for higher yields in equity markets, leading to the "misallocation of capital and mispricing of risk."
At the same time, others emphasized that it was appropriate to wait for additional data to determine whether prices could firm in the coming months, as long-term inflation continues to run below the Fed's long-term goal of 2%.
The members noted that by delaying tightening the Committee could have a sufficient amount of time to respond if inflation increased more quickly than it anticipated. "The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run," the FOMC said in the minutes.
"However, members emphasized that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data."
Following the release, the CME Group's (NASDAQ:CME) FedWatch tool said there is an 18% chance the FOMC will raise rates at its September meeting, up from around 9% in Monday's session. Additionally, the CME Group placed the probability of a December rate hike at 49.7%, up from around 41.9% on Monday. EUR/USD rose moderately to an intraday high of 1.1316, before falling back slightly to 1.1290 at the close of U.S. afternoon trading.
During the previous session, the euro posted sharp gains against the Dollar to eclipse 1.13 for the first time since the historic Brexit referendum in late-June. GBP/USD fell 0.03% to 1.3041, while USD/JPY lost 0.09% to 100.05.
The Dollar remains near one-year lows against the Japanese Yen. Yields on the U.S. 10-Year fell three basis points to 1.55%, remaining relatively unchanged after the release of the Fed minutes. Over the last year, government bond yields on 10-year U.S. Treasuries are down by more than 60 basis points.
