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Asian Session – Fed says conditions for rate hike ‘approaching’ but worried about low inflation, dollar falls

The dollar fell against major currencies on Wednesday after the Fed published the minutes of the FOMC meeting in July. The Fed sounded concerned on the persistently low inflation levels and was only ‘reasonably confident’ that inflation would return to the 2% target in the medium term. Some within the FOMC were more doubtful though on the inflation outlook, citing downside risks such as further falls in oil and commodity prices, further appreciation of the dollar and the lack of any inflationary pressures from a tightening labor market. However, the committee was more confident about unemployment and said that the outlook for the labor market and economic activity was ‘nearly balanced’.

The recent developments in China and Greece were said to have only a limited impact on the US economy but did express concern the slowdown in the Chinese economy might have on growth outlook in the US. As the meeting was held before the yuan’s devaluation, the committee might judge the risks from China to be higher in its next meeting. On balance, the committee said the weakness in manufacturing and inflationary pressures were transitory and that ‘the conditions for policy firming had not yet been achieved’ but were ‘approaching that point’.

Markets downgraded their expectations of a September rate hike after the minutes came out as investors interpreted the minutes to be signalling that the Fed would prefer to see higher inflationary pressures before deciding to raise interest rates. The dollar index fell to a 6-day low after the minutes but posted a small recovery in Thursday’s Asian session. The greenback rose to 124.13 against the yen in late Asian session after dropping to 123.68 in Wednesday’s US session. The euro was back above the 1.11 handle and was last trading at 1.1122.

The pound dropped to 1.5662 dollars and to 0.7100 pounds per euro as it awaits today’s retail sales data for further guidance on UK rates outlook.

In China, shares were once again in the red, down by almost 3% in late Asian session after yesterday’s late rally proved short-lived. The losses came despite the MNI China Business Indicator rising to a 12-month high in August as markets remain anxious about whether Chinese authorities will intervene to prop up share prices again.

Crude oil prices continued to head lower with WTI crude futures falling to a 6-year low and was last trading at $40.48, while Brent crude futures were down at $46.86. The Canadian and Australian dollars were down on the day at CAD 1.3144 per USD and USD 0.7297 per AUD respectively.

Coming up later in the day, UK retail sales for July is the only major data coming out of Europe, while over in the US, the initial weekly jobless and the July existing home sales figures will be closely watched.

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