NEWS / Indicators

Caution limits dollar selling

The Euro weakened to 1.2750 in New York trade on Tuesday before strengthening back to 1.2825 after the FOMC minutes. The Euro tested the 1.2850 level in Asian trading on Wednesday before drifting to 1.2830 as trading remained cautious.

The FOMC minutes from the August meeting stated that most Fed members expected inflationary pressure to ease over the next few months. Staff officials also downgraded growth forecasts for the next 12 months and this helped convince members that there were only limited risks to sanctioning a pause in tightening process to await further data. Although the decision was a close call, the level of dissent was subdued and the overall stance of the minutes will lessen expectations of a near-term increase in interest rates.

The Fed is concerned over an upward creep of inflation expectations, but will find it difficult to tighten if the economic data remains weak and the market is putting the chances of a September rate increase at only around 10%. Only very strong data over the second half of this week will shift these expectations and provide more durable dollar support.