Dollar Weakens After FOMC Minutes

February 18, 2015 Wall Street Journal

February 18, 2015

Dollar Weakens After FOMC Minutes
Fed’s conversation seems to lessen likelihood of higher interest rates around midyear

By: James Ramage

The dollar weakened against the yen and the euro Wednesday after the minutes from the most recent Federal Reserve meeting disappointed investors who had been hoping for higher interest rates around midyear.

The dollar fell to 118.79 yen in late-afternoon trade, down 0.4%. The euro gained to $1.1398, though still lost 0.1% for the session.

Minutes from the Federal Open Market Committee meeting on Jan. 27-28 showed that some officials thought premature rate increases might weigh on the U.S. economy’s recovery, and that a deterioration of economies overseas could present risks to the nation’s economic outlook. This suggested the central bank may wait longer to raise rates for the first time since 2006.

The Fed’s cautious message diverged from that of the January meeting’s statement, which signaled that the central bank could raise rates as early as midyear.

“This will take some of the steam off the dollar’s rally,” said Scott Smith, senior market analyst with Cambridge Mercantile Group, which provides currency-hedging services to corporations. “But it doesn’t change the bigger picture of a longer-term dollar uptrend.”

In the minutes, the Fed is attempting to prepare markets for a rate increase in 2015 without shocking them, Mr. Smith said. Fed officials want to make sure that the domestic economy has sufficient momentum and that its headwinds to growth are diminished, he said.

The U.S. currency stands to gain from higher interest rates. Investors have poured into U.S. assets and the dollar over the past several months predicting the Fed will raise interest rates before other central banks would. After the Fed minutes’ release Wednesday, investors trimmed some of their bets on a stronger dollar.

Next week, Fed Chairwoman Janet Yellen will testify before lawmakers on Capitol Hill on the economy and interest rates. Investors will listen for Ms. Yellen’s characterization of how the Federal Reserve has processed recent labor-market trends, said Richard Cochinos, head of Americas developed-market currency strategy at Citigroup Inc.

“For a dollar downturn to be sustainable,” Mr. Cochinos said, Ms. Yellen “would have to be dovish in her testimony next week.”

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