“Today’s minutes simply indicate that the Fed will most likely reduce asset purchases later this year,” Kathy Lien, managing director of BK Asset Management, said.
Even as U.S. bond rates fell to their lowest levels since February, the dollar index, which measures the greenback against a basket of peer currencies, was up 0.135 percent at 92.664, stabilizing near its recent 3-month high.
Lower bond yields, as well as some recent weak economic news, certainly contributed to the dollar’s tepid reaction to the Fed minutes, according to Lien.
However, the US economy is faring better than Europe and Japan in the aftermath of the COVID-19 outbreak, which bodes well for the greenback, she added.
“The bottom conclusion is that there wasn’t a large reaction, but I don’t think it prevents the dollar’s advances from continuing,” she added.
The divergence between central banks that begin winding down monetary stimulus based on solid economic fundamentals and those that do not, according to Win Thin, global head of currency strategy at Brown Brothers Harriman, will be one of the main drivers of foreign exchange in the second half of the year.
According to him, the US dollar index is currently trading more than 3% higher than it was in February, when US yields were last this low.
“Which brings us back to expected US economic performance and the Fed’s eventual removal of support,” he said.
On Wednesday, the euro fell to a three-month low versus the dollar after German data cast doubt on the strength of the rebound.
After hitting a three-month low of $1.17815, the European single currency traded at $1.18035. It plummeted to 130.535 yen against the yen, creeping closer to a two-month low of 130.05 hit on June 21.
The ZEW economic research center revealed that investor sentiment in Germany, the euro zone’s largest economy, declined dramatically in July, but it remained quite strong.
Other risky currencies took a hit as oil prices plummeted after OPEC producers called off a meeting after main participants failed to reach an agreement on supply increases.
The Australian dollar fell 0.14 percent to $0.7484, settling following a brief rally on Tuesday, when the Reserve Bank of Australia took the first move toward withdrawing stimulus.
The Reserve Bank of Australia announced a third wave of quantitative easing, however it would be smaller than the previous two rounds, and will keep the April 2024 bond for its three-year rate objective of 0.1 percent.
The Japanese currency was little changed at 110.590 yen per dollar, maintaining gains from last week’s 15-month low of 111.64.
Check out our economic calendar for a complete list of today’s economic happenings.
(John McCrank contributed reporting; Ritvik Carvalho contributed further reporting in London; Alexander Smith, Hugh Lawson, Andrea Ricci, and Cynthia Osterman edited the piece.)
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