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 U.S. Treasury yields and the implied rates on Fed fund futures
<0#FF:> retreated sharply on word of the minutes, with the market
not seeing any appreciable rise in the Fed's target rate until
around September 2015, from June 2015 previously.
The dollar, which has a good correlation with U.S. yields and rate
expectations, fell 0.5 percent to 107.55 yen <JPY=> on trading
platform EBS, its lowest point since mid-September.
The dollar index, which measures the greenback against a basket of
major currencies <.DXY>, also shed 0.3 percent to 84.937, its lowest
level in two weeks. It had hit a four-year peak of 86.746 on Friday.
"Fed minutes caught the market wrong-footed," said Susanne Galler,
currency strategist at Jefferies.
"Considering the hawkish market interpretation of the Fed meeting in
September, on the back of higher 'dots', the Fed's more cautious
language in the minutes caused some confusion. We see positioning as
the key factor for the market's reaction."
Investors have been buying the dollar for 12 straight weeks, its
longest winning streak in four decades, helped by a recent string of
upbeat U.S. data. The latest nonfarm payrolls released last Friday
had led dollar bulls to believe that the Fed might hike interest
rates sooner rather than later.
But minutes released on Wednesday suggested the central bank was in
no such hurry. In fact, policymakers were worried the recent rally
in the greenback might slow the gradual increase in inflation toward
the Fed's 2 percent goal.
"This is the first time that the Fed has referenced this in this
cycle," Morgan Stanley analysts said in a note. As a result, they
said, the dollar is undergoing a correction which is likely to
extend further in the near term.
CURRENCY WARS?
The Fed's surprise mention of the dollar's strength has guided
investors to stay cautious about buying the greenback at dips and
triggered talk of a currency war. The euro zone, Japan and now the
United States all seem keen to keep their currencies weak to bolster
exports and growth, analysts and traders said.
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"Keeping interest rates low (by the Fed) will only go so far whilst
Europe is in the doldrums. It will essentially create a competition
to see who has the weakest currency whilst they both strive to
bolster economic growth," said Jon Pryor, head of FX dealing at
Investec.
The dollar's rally in the past three months had seen the euro hit a
two-year low. But with the dollar coming under pressure, the euro
gained to $1.2791, its highest level in two weeks, and nearly three
cents above a two-year trough near $1.2500 set last week. Its gains
came despite dismal German export data.
The euro's jump is not good news for the European Central Bank,
which is pinning its hopes on a weaker exchange rate. A weaker euro
could revive growth through exports and help avert the threat of
deflation.
ECB President Mario Draghi, set to speak later on Thursday, is
likely to highlight the growing divergence in monetary policy
outlooks between the United States and the euro zone and reiterate
that the central bank is keeping all its options open -- including
quantitative easing.
With the dollar on the back foot, commodity and emerging market
currencies got a lift. The Australian dollar rose 0.5 percent to
$0.8885, pulling away from a four-year low of $0.8642 set last week.
(Editing by Mark Heinrich)
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