Dollar Falls Against Yen, Euro Following Fed Minutes

July 8, 2015 Wall Street Journal

Dollar Falls Against Yen, Euro Following Fed Minutes
Central bank remains cautious on U.S. economy, raising interest rates

By James Ramage

The dollar fell against the yen and the euro on Wednesday, after minutes from the most-recent Federal Reserve policy meeting showed the central bank remained cautious about the U.S. economy and raising interest rates.

The minutes from the Federal Open Market Committee also warned about the pace of growth beyond the U.S., specifically in China, as well as turbulence that could result from the Greek debt crisis. Those are developments that have grown even more uncertain since the central bank’s two-day meeting concluded on June 17 and which have weighed on markets this week.

The FOMC minutes likely nudged back the timing of the central bank’s first interest-rate increase in nine years toward the end of the year or perhaps even into 2016. Higher U.S. rates would make the dollar more attractive, as they would increase returns on dollar-denominated investments.

Consequently, the U.S. currency fell 1.6% in value against the Japanese yen to 120.66 per dollar, heading for its lowest New York close since May 18 and its largest daily percentage drop in seven months. The dollar slid 0.5% versus the common currency, with one euro buying $1.1070 in late-afternoon trading.

The FOMC minutes expressed concern over how slowly consumer spending was rising, a support to U.S. growth that largely has been stubbornly lackluster. Furthermore, some officials “were concerned that consumers could remain cautious or that the drag on sectors affected by lower energy prices and the higher dollar could persist,” according to the minutes.

Collectively, the minutes offered investors little to suggest higher U.S. borrowing costs were forthcoming, said Karl Schamotta, director of currency risk and strategy at Cambridge Global Payments, which handles currency hedging for corporations.

“The meeting definitely demonstrated a sense of caution, showing the Fed wanted to sit on the sidelines on interest rates a bit longer,” Mr. Schamotta said. “But as far as the dollar’s concerned, developments in Greece and China really overshadow what the Fed minutes were expressing.”

China’s recent equity-market selloff has raised questions about other possible distortions in the world’s second-largest economy that could affect global growth, sending ripples across the financial markets. The Shanghai Composite Index fell for a second day, as investors lost confidence in Beijing’s ability to stem the slide in Chinese equity markets and manage the economy. As the Shanghai index fell 5.9% Wednesday, other Asian markets also slid, with Japan’s Nikkei 225 index losing 3.1%.

Meanwhile, investors watched as Greece requested a three-year bailout from the eurozone’s rescue fund to prevent a meltdown in its banking system and its exit from the eurozone. Investors and Fed officials, FOMC minutes show, have been worried about the potential turbulence a Greek exit could generate in Europe’s financial markets and possibly the U.S.

The uncertainty encouraged investors on Wednesday to move into assets perceived to hold their value in uncertain or turbulent times, such as the Japanese currency, which gained for a fifth consecutive session.

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