As we noted in this morning’s FOMC minutes preview, traders were poised for the Federal Reserve to pave the way to potential rate hike as soon as June this year, concluding that “Unless the minutes show that the committee was far more dovish than the headline statement… King Dollar could extend its dominion and continue to attract new subjects.” As it turned out, the minutes did show a surprisingly dovish Fed, and as a result, the world’s reserve currency is seeing a modest dip.
For dollar bulls, there were a number of concerning headlines from the FOMC minutes, but perhaps the most concerning was that “…many Fed officials were inclined to stay zero interest rates for longer.” Of course, much of the dollar’s rally in over the past few weeks and months has been underpinned by an expectation that the central bank would be interest rates sooner than the rest of its developed world rivals; while the Fed is still likely to beat its G10 rivals to the punch, today’s minutes suggest it may not be as soon as the most ardent USD optimists had hoped. That said, we have since seen a solid jobs report that could take some of the edge off this less optimistic domestic assessment.
The other major concern noted in the minutes comes from overseas. While the official statement only included a few words about monitoring “international developments,” the internal discussion was apparently much more detailed. FOMC voters discussed risks from a variety of geopolitical hotspots, including China, the Middle East, Ukraine and Greece. Individually, none of those regions are necessarily a showstopper when it comes to Fed policy, but collectively, there is a growing risk that at least one could boil over and shake global economic confidence. Significantly, these concerns have only been exacerbated in the last few weeks since the Fed’s January meeting, so traders should expect more discussions about the potential overseas albatross around the US economy’s neck, especially with the safe haven dollar’s recent appreciation already impacting US exporters.
As of writing, most major markets have taken the Fed’s less-hawkish-than-anticipated comments in stride. US equities bounced off their lows, but still remain modestly negative on the day, while the US dollar has also pulled back a tick, with EURUSD briefly peeking above 1.1400 and USDJPY ticking back below 119.00. Probably the most significant move was in US bond yields, where the benchmark 10yr yield shed 5bps to trade back down around 2.07% as traders pushed back their expectations for a June rate hike.