The US dollar is on its back foot. It was already sporting a softer bias and the FOMC minutes were read with a dovish twist. A Wall Street Journal poll found 64% of economists expect a hike in December, and while the minutes might not substantively change that, the confidence is weak.
While most Fed officials see the conditions for lift off having been met or soon to be, the concern is that the downside risks increased as well. On surprise contained in the minutes was the repeated references to the dollar. According to Bloomberg, the dollar was mentioned at least two dozen times in the September minutes twice as much as it was cited in the minutes from the July meeting.
There was never a very strong chance of an October hike. In fact, only one of 64 economists participating in the Wall Street Journal survey envisioned an October hike. In order to boost confidence in a December move, many economists want to see stronger jobs data, easing of the dollar's momentum (which seems to be happening), and greater stability in China and emerging markets. It may take some time for these conditions to materialize.
That said, the Fed continues to view the impact of the dollar's strength and the decline in oil prices to have a temporary impact on inflation. The dollar is posting new lows for the week against the major currencies, but the yen, and many emerging market currencies as well. Brent, which finished last week near $48, tested $54 today while the November light crude futures is above $50 a barrel of the first time since late July. This is nearly 10% above last week's close.
The less than hawkish signal from the Fed, coupled with the rally in oil and commodities more broadly, rekindled the upside momentum in the dollar-bloc currencies, which had flagged near mid-week. The Canadian dollar has gained about 1.6% this week against the US dollar, nearly a third is being recorded today. Higher oil prices, a smaller Canadian interest rate discount to the US, and the generally weaker tone for the greenback is taking its toll.
