Dollar Hits Air Pocket, Fed Minutes Ahead

Written by Marios Hadjikyriacos, Senior Investment Analyst at XM.com. An original version of this article can be found here.

The U.S. dollar hit an air pocket this week, losing altitude without any clear news catalyst behind the decline.

Incoming data continues to point to a US economy that is running hot, with economic growth on track to hit 3% this quarter, a historically tight labour market, and persistently high inflation readings.

Hence, nothing has really changed on the macro front, which suggests the dollar’s retreat might simply be a setback in a broader uptrend, backed by a US economy that is outperforming the rest of the world.

Technical recessions in the UK and Japan, stagnant growth in the Eurozone, and the fallout in China’s property sector all point to the U.S. dollar as the ‘cleanest shirt in a dirty laundry basket’.

Above: The Pound to Dollar exchange rate has edged higher this week.

Minutes of the latest Fed meeting will be released later today and will offer the dollar a chance at redemption.

Since that meeting, Fed officials have preached patience on interest rates, pointing to the resilience of the US economy and warning that premature rate cuts would raise the risk of inflation becoming embedded.

Recent data releases have endorsed this view, with consumer and producer prices coming in hotter than expected in January.

Fed officials didn’t have access to this data when they met, but the minutes are sometimes ‘massaged’ after the event to highlight certain points the central bank wants to convey.

In this case, the underlying message might be that the US economy is simply too hot for the Fed to cut rates in the near future. That’s a signal that can put the wind back in the dollar’s sails.

Above: Dollar index

Gold prices are trading higher for a sixth consecutive session, riding the wave of a softer US dollar, which has retreated sharply over the same period. A weaker dollar makes it cheaper for foreign investors to buy the dollar-denominated precious metal, boosting its demand.

This recovery will be put to the test today with the release of the FOMC minutes. If the minutes echo remarks from Fed officials arguing against early rate cuts, the US dollar and yields could bounce back, which in turn might prove negative for bullion and interrupt its winning streak.

Elsewhere, assets with exposure to the Chinese economy are back in fashion after a heavy cut on mortgage rates yesterday to stimulate the nation’s distressed property market. Chinese equities and China-sensitive currencies like the Australian and New Zealand dollars have been the main beneficiaries.

Despite the newfound optimism, it’s difficult to say that this rate cut will be enough to turn the tide in the property sector, which is dealing with the toxic aftermath of decades of malinvestment and overinvestment.

Unless Beijing rolls out fiscal stimulus with true firepower to compliment the lower rates, this recovery might prove to be yet another dead-cat bounce.

Nvidia has been carrying the stock market on its shoulders this year, so its quarterly earnings today could have repercussions beyond its own shares. Expectations are riding high, with analysts projecting earnings to have risen more than 400% from last year thanks to the artificial intelligence boom.

The options market is pricing in a move of 11% in either direction for Nvidia shares today, which would inevitably leave a footprint on the entire stock market given the company's ballooning market cap.

In other news, Amazon will join the Dow Jones Industrial Average from next week, replacing Walgreens Boots Alliance.