Dollar strengthens after Fed minutes

The minutes from the Federal Reserve's meeting this month, so eagerly awaited by the market for clues as to when or by what amount the market committee might decide to reduce the monthly bond purchases provided very little clarity. According to the minutes the majority now seem to be in favour of the idea of tapering the $85bn bond purchases but they were very non-committal on when, deciding instead to keep just about every option on the table for now.
 
The majority view is that they will agree a reduction at the next meeting in September providing months payroll numbers aren't particularly weak. They have to be considering the upwards momentum this unprecedented expansion of their balance sheet could eventually have on inflation and they will still be expanding the balance sheet, just not by as much. There will still be a very accommodative monetary policy stance from the Fed to support growth in the world's largest economy.
 
The Dollar snapped back a week-long losing streak against the pound and is up almost 1% having been at a 2-month low just over 1.57 yesterday. It also strengthened against the euro though by less, having been at a 6-month low against the single currency of 1.3450 on Tuesday. We would expect the current policy divergence between the US and European central banks (ECB and BoE) to favour a the dollar. However, the recent improvements in economic data from the UK and eurozone should provide some support to both currencies if sustained.

By Andy Scott, premier account manager at foreign currency exchange brokers HiFX.