NEWS / Central Banks

Rate speculation hurts dollar

The US currency continued to edge weaker during Thursday, although the moves were relatively limited in cautious trading. The US currency was holding little changed in early Europe on Friday before retreating towards 1.2675.

The US Philadelphia Fed index weakened to 6.0 in July from 13.1 the previous month as the pace of orders slowed. The strengthening price components, however, illustrated the difficulties faced by the Federal Reserve in setting interest rates.

The FOMC minutes from June revealed that all members supported a rate increase and were concerned over the rise in core inflation. Some, however, considered the increase a close call given the probability of slower growth and the risks of tightening too far. Given that the data since then has suggested a slowdown in growth, there will be a high risk of a policy split at the August meeting. Market expectations of an August increase have already dipped to around 50% from 90% at the beginning of the week, but the dollar will still be vulnerable if expectations weaken further.