Dollar steadies as markets await Fed minutes and inflation data

The dollar index was little changed on Wednesday, as investors awaited the release of the Federal Reserve’s minutes from its September meeting and a key inflation report on Thursday for clues on the future direction of interest rates.


Fed minutes in focus

The dollar index, which measures the greenback against a basket of six major currencies, was flat at 105.74, after touching a two-week low of 105.6 earlier in the session. The index had fallen for five consecutive trading days, as U.S. Treasury yields declined and markets digested recent comments from Fed officials that suggested the central bank may not need to tighten monetary policy further.

The minutes from the Fed’s September policy meeting are due later on Wednesday, and could shed more light on the Fed’s thinking about inflation, growth and the tapering of its bond-buying program. The Fed had signaled in September that it could start reducing its monthly asset purchases as soon as November, and raise interest rates next year.

However, some Fed policymakers have expressed doubts about the need for further rate hikes, given the uncertainty caused by the coronavirus pandemic and the supply chain disruptions that have hampered the economic recovery. On Tuesday, Atlanta Fed Bank President Raphael Bostic said the central bank did not need to raise borrowing costs any further, while Minneapolis Fed President Neel Kashkari said it was “possible” that further hikes might not be needed.

“The market is looking for any hints on whether the Fed is still confident about its tapering timeline and its inflation outlook,” said Lee Hardman, currency analyst at MUFG. “If the minutes show more caution or division among the Fed members, that could weigh on the dollar and push up risk appetite.”

Inflation data eyed

Another key event for the dollar this week is the release of the U.S. consumer price index (CPI) for September on Thursday, which will provide an update on the inflation situation in the world’s largest economy. Inflation has been running above the Fed’s 2% target for several months, driven by higher energy, food and housing costs.

Analysts expect the CPI to rise 0.3% month-on-month in September, slowing from a 0.5% increase in August. The annual inflation rate is forecast to ease slightly to 5.3% from 5.4%. However, any surprise in the data could trigger a market reaction, as inflation expectations are a key factor influencing the Fed’s policy decisions.

“A higher-than-expected CPI reading could boost the dollar and lift Treasury yields, as it would increase the pressure on the Fed to act sooner rather than later,” said Valeria Bednarik, chief analyst at FXStreet. “On the other hand, a lower-than-expected CPI reading could undermine the dollar and support riskier assets, as it would ease some of the inflation fears and give the Fed more room to maneuver.”

Other factors

Apart from the Fed minutes and the inflation data, investors were also keeping an eye on other factors that could affect the dollar and market sentiment. One of them was the conflict between Israel and Palestinian Islamist group Hamas, which has escalated in recent days with rocket attacks and airstrikes. The violence has raised some geopolitical risks and prompted some safe-haven flows into the dollar and other assets.

Another factor was the progress of the U.S. fiscal stimulus package, which has been delayed by disagreements among Democrats over its size and scope. The $3.5 trillion spending plan is seen as supportive for growth and inflation, but also as potentially adding to the U.S. budget deficit and debt burden.

The dollar was mixed against other major currencies on Wednesday, gaining against the yen and the Swiss franc, but losing ground against the euro and the pound. The euro rose to a more than two-week high of $1.0628, as euro zone households expected inflation to stay slightly above the European Central Bank’s 2% target for another three years, according to an ECB survey. The pound climbed to a three-week high of $1.2304, as optimism over a Brexit deal outweighed concerns over rising COVID-19 cases in Britain.

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