US Dollar Drops From 7-Month High Against Euro Before Fed Minutes

Frankfurt (Nov 18) The dollar retreated from a seven-month high against the euro before the Federal Reserve releases minutes of its October meeting, as some investors reduced positions in the U.S. currency in case the report turns out to be dovish.

A trade-weighted gauge of the greenback was at the highest in 12 years after Fed Chair Janet Yellen and other policy makers made numerous pronouncements in the past month that it may be appropriate to boost rates from near zero at their Dec. 15-16 gathering. The probability the central bank will act next month has risen to 66 percent from 50 percent odds at the end of October, futures contracts show.

“It’s a position adjustment ahead of key events this week, including the Fed minutes,” said Valentin Marinov, the head of Group-of-10 currency research at Credit Agricole SA’s corporate and investment bank unit in London. “A lot of positives have already been in the price.”

The dollar weakened 0.2 percent to $1.0668 to the euro as of 11:12 a.m. in London after appreciating to $1.0631 on Tuesday, the strongest level since April 16. The U.S. currency fell 0.1 percent to 123.34 yen, following a two-day gain of 0.7 percent.

Appreciation Question

“The October minutes could be perceived as dovish if they highlight policymakers’ concerns about the renewed appreciation of the dollar and the tightening in U.S. financial conditions evident in the rates markets,” Marinov said. “I doubt that the Fed could be much more hawkish than the market is expecting.”

A trade-weighted index of the U.S. currency climbed to 121.5 on Nov. 13, the highest since April 2003, according to data compiled by Bloomberg. It has increased 13 percent in the past year.

Liftoff Odds

The odds of December liftoff have climbed from as low as 33 percent on Oct. 2, according to futures data compiled by Bloomberg. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

The dollar is likely to retain its strength against other developed-market currencies on a longer-term basis, according to Kelvin Tay, regional chief investment officer at UBS Group AG’s wealth-management business, in Singapore.

Underscoring the divergence between the Fed and other developed-market central banks, ECB officials said they will reexamine their monetary stimulus program in December. President Mario Draghi said on Nov. 12 that risks to the euro-zone economy are “clearly visible” and reiterated that policy makers meeting next month will take another look at the stimulus they’re providing.

While the Bank of Japan last month refrained from stepping up its policy response, the central bank is currently expanding its monetary base at an annual pace of 80 trillion yen ($649 billion).

“On a short-term basis you might see some volatility, but the dollar’s going to be pretty resilient against everything else,” Tay said.

Source: Bloomberg