Dollar Stabilizes After Wednesday’s Sell-Off

The US dollar stabilized after yesterday’s sell-off caused by mixed macroeconomic reports and minutes of the October-November policy meeting of the Federal Open Market Committee.

FOMC members voiced concern about sluggish inflation but had mixed view on how that should affect monetary policy. Some argued that it warrants more gradual monetary tightening:

A number of these participants were worried that a decline in longer-term inflation expectations would make it more challenging for the Committee to promote a return of inflation to 2 percent over the medium term. These participants’ concerns were sharpened by the apparently weak responsiveness of inflation to resource utilization and the low level of the neutral interest rate, and such considerations suggested that the removal of policy accommodation should be quite gradual.

Others thought that it may be dangerous to wait too long before removing monetary accommodation:

In contrast, some other participants were concerned about upside risks to inflation in an environment in which the economy had reached full employment and the labor market was projected to tighten further, or about still very accommodative financial conditions. They cautioned that waiting too long to remove accommodation, or removing accommodation too slowly, could result in a substantial overshoot of the maximum sustainable level of employment that would likely be costly to reverse or could lead to increased risks to financial stability.

As for an interest rate hike in December, it still looked rather probable as the minutes stated:

Consistent with their expectation that a gradual removal of monetary policy accommodation would be appropriate, many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged.

CME FedWatch was still showing probability of the December hike bigger than 90%.

Today’s trading was quiet due to a public holiday in Japan and Thanksgiving in the United States. Tomorrow’s trading in the USA will be abbreviated.

EUR/USD edged up from 1.1821 to 1.1851 as of 18:31 GMT today. GBP/USD declined from 1.3325 to 1.3305. USD/JPY traded near the opening level of 111.20 after touching 111.06 — the lowest level since September 18.

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