Dovish Fed Minutes Sink Dollar, Boost Aussie, Kiwi and Yen

Despite the holiday-shortened week and the absence of several major players, there was plenty of action in the Forex markets last week. Most of it was driven by the release of the minutes of the U.S. Federal Reserve November meeting.

Traders felt the minutes were dovish because several Federal Open Market Committee members expressed concerns over inflation and its potential impact on the central bank’s plans to raise rates at least three times in 2018. This assessment helped drive down the U.S. Dollar, providing support for the Australian Dollar, the New Zealand Dollar and the Japanese Yen.

 

Australian Dollar

The Australian Dollar recovered last week against the U.S. Dollar after the release of the dovish U.S. Federal Reserve monetary policy meeting minutes. Upbeat comments from a Reserve Bank of Australia (RBA) official also helped boost the Aussie.

The AUD/USD settled at .7612, up 0.0048 or +0.64%.

The Reserve Bank slightly downgraded its outlook for economic growth in Australia while signaling only a gradual rise in headline inflation.

In its quarterly statement on monetary policy released last week, the RBA saw growth in December 2017 of 2.5 percent easing back from 2 to 3 percent in the previous forecast issued in August.

The Reserve Bank sees headline inflation creeping slightly higher to 2 percent in December 2017 and not touching 2.25 percent until December 2018.

The weaker outlook for rising inflation adds to expectations that the Reserve Bank will leave the cash rate on hold at the historic low of 1.5 percent indefinitely.

In other news, Australia’s central bank chief Governor Philip Lowe said interest rates will likely rise eventually as policymakers’ patience is finally rewarded with unemployment falling sufficiently to spur wage growth and faster inflation.

“We’re not too far away from 2 percent and I think we’ll get there, we’re just not getting there as quickly as we would like to,” Philips said of reaching the bottom of his inflation target. “We’re prepared to be patient. We’re getting there, we’re making progress, we’re patient and we’ll continue to be patient.”

Philips added, “I think eventually the forces of supply and demand will win out and wage growth will pick up, it’s just taking time,” he said. “My sense is that wage growth has stabilized at a low level and it’s not going to fall further.”

The governor also reiterated a comment he made upon first taking the helm last September RBA officials aren’t “inflation nutters” and were prepared to tolerate weaker consumer price growth for a period to ensure the Australian economy remains stable.

New Zealand Dollar

The New Zealand Dollar also responded to the dovish Fed minutes by rallying against the U.S. Dollar. Domestic data was not that impressive. The GDT Price Index fell again. This time dropping 3.4% versus the previous 3.5% decline. Retail Sales came in at 2.0%, better than the previous 1.8% read, but below the estimate. The Trade Balance deficit shrank to -871 million versus the previous -1156 million read.

The NZD/USD settled at .6866, up 0.0054 or +0.79%.

Japanese Yen

The Dollar/Yen retreated in response to the dovish Fed statement. The news helped tighten the spread between U.S. Government Bonds and Japanese Government Bonds. This helped make the Japanese Yen a more attractive currency. The Yen was also boosted earlier in the week after a steep drop in Chinese equity markets.

The USD/JPY settled at 111.486, down 0.572 or -0.51%.