U.S. Dollar Weakens After Indications the Fed Is Still Considering Rate Cuts

Alan Penny

11 July 2019

3 min read

Federal Reserve System

The U.S. dollar weakened during Thursday’s Asian trading session after Federal Reserve Chairman Jerome Powell indicated the central bank was still prepared to lower interest rates in the near future.

Thus, the U.S. dollar index slid another 0.2% to 96.507 after losing 0.4% on Wednesday on the back of Powell’s position.

Powell Talks of Global Weakness

During his appearance before Congress, Powell brought out the weakness of the global economy and its negative effects on the outlook for the U.S. economy. This is only compounded by worries of how the trade issues fostered by President Trump’s administration with China and other countries will affect markets.

His overall stance was dovish, with the minutes from the previous Fed policy meeting indicating that many feel further stimulus will be required in the near future. Thus, the market has reverted to its belief that an aggressive rate reduction is likely to happen quite soon.

Though the strong jobs figures released last week had many believing the Fed would take a step back, Powell pointed out that overall growth has slowed down. He also stated that the risk of weak inflation continuing was much higher than expected.

The problem seems to be that wages didn’t increase sufficiently to drive up inflation, which he feels should be higher.

Subsequently, the minutes of the meeting were released. They showed that some of the policymakers felt that the “uncertainties and downside risks surrounding the economic outlook had increased significantly over recent weeks.”

However, some experts are worried that the way the policymakers came to their conclusions wasn’t as objective as they would have the markets believe.

For example, Helen Thomas, the CEO of Blonde Money – a consultancy firm – stated that the minutes indicated that the Fed is, essentially, bowing to the dictates of the financial markets and an administration that is more focused on next year’s elections.

She said that the Fed would point out a variety of factors, including geopolitical issues, trade tensions, Brexit, and so on, but the conclusion is that it all doesn’t matter since rate cuts will happen.

Jerome Powell will once again be speaking later today, but this time it will be before the Senate Banking Committee.

U.S. Dollar Loses Big Against the Yen

On Thursday, before the open of the U.S. trading session, the U.S. dollar experienced the greatest level of weakening against the yen. Thus, the currency slid to 107.86 before it recovered slightly to 108.07.

Some believe there’s a good chance the Bank of Japan will extend its promise to maintain rates at their current very low level. In fact, it’s assumed the BoJ will commit to this at the meeting set to take place at the end of July, right before the Fed is expected to cut rates.

In April, the Bank of Japan promised it would maintain very low rates until at least the spring of 2020 while it keeps an eye on the effects of an increase in the sales tax, which is slated to take place in October.

Some analysts have warned that there’s a chance the yen will spike in reaction to rate cuts in the United States. However, Kazuo Momma, one of the Bank of Japan’s former executive directors, stated that this is unlikely to occur since the markets have already priced in the cut.

He further explained that the Bank of Japan will likely want to reiterate and extend its promise to keep rates low to ensure the market doesn’t start wondering whether they truly are committed or not.

How long the extension will be will depend on the central bank’s economic outlook. Momma says that the extension will be aggressive if the figures are clear that the world economy won’t improve within half a year.

Written By
Alan Penny

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