FOMC Minutes Kill the Dollar

Last updated 10/14/2009 3:02 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

The dollar fell to new lows against 4 out of the 7 major currencies on the heels of the FOMC minutes which revealed a surprising division within the Fed. Last week, Federal Reserve Chairman Ben Bernanke gave the markets false hope. According to the tone of the minutes from the September monetary policy meeting, his inherent optimism failed to accurately reflect the central bank’s stance on monetary policy. As we suspected, they are in fact much more dovish than many would have expected. This leaves us with no choice but to assume that his comments were purely attempts to indirectly talk up the dollar. For the time being, plans for increasing stimulus have taken the place of any serious discussions about exit strategies. It was reported that several board members actually wanted to extend Mortgage Backed security purchases beyond the currently staggering $1.25T allotment. Their primary concern is the labor market and how the economy would react without additional government aid. Although members of the FOMC believe that a recovery is underway, it is “quite restrained” as consumers are expected to remain cautious. Improvements in the labor market are not expected to be dramatic. By the end of 2010, the unemployment rate is expected to fall to 9.25 percent and only by the end of 2011 is it expected to hit 8 percent.

The minutes also highlighted a growing divide within the Fed, which is reminiscent of Bank of England’s disagreement over how much quantitative easing should be expanded. A few members wanted to slow asset purchases over a longer period of time while others wanted to taper asset purchases quickly. The lack of agreement within the FOMC suggests that they will lag their peers in exiting from their ultra easy monetary policies. As a result, the Fed could end up lagging its peers, which would be dollar bearish.

Meanwhile the new catch word seems to be capacity slack, an issue that the Fed believes will lead to “subdued and potentially declining wage and price inflation.” This evaluation of the threat of deflation is somewhat more severe that what has been previously mentioned by the Fed. In the end, the board championed the flexibility in its decisions to expand or reduce the asset purchases depending on the pace of the recovery. This leaves future decisions wide open but indicates that like the BoE, more easing is not off the table.

Comments (2)

klien

October 14, 2009 at 05:21 PM ET

Overall the dollar is still very weak. USD/JPY is ending the day in negative territory. But at the same time, stocks are up alot which is limiting the decline in USD/JPY which tends to have a positive correlation with equities

m.hollingshaw

October 14, 2009 at 05:19 PM ET

Do forgive my ignorance and perhaps this isn't the place to ask but looking at USD/JPY the FOMC announcement had a very short lived spike down to 89.08 and then (currently) rose to 89.40/45. Why, given the recent onslaught of negative data on the USD, did it remain firm? I'm sorry if you've explained this I may have overlooked it. Thank you.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.