Dollar Makes Steady Climb on Safety Bids, Fed Taper Advice
The US dollar continued its steady climb into Thursday, as the currency received the benefit of both a flight-to-safety and the impression that the Federal Open Market Committee could taper earlier than previously expected.
While the minutes of the Federal Open Market Committee’s July 27-28 policy meeting left almost as many questions as answers, markets read them as speeding up the taper timeline. The minutes showed that most participants thought tapering could begin this year, while several suggested that early-2022 would be better.
Those participants who felt a 2021 taper is possible also based that outlook on conditions developing as expected and acknowledged the delta variant of the coronavirus as a possible headwind to the continued recovery.
Since that meeting, there have been a sharp increase in confirmed cases of the delta variant and more modest growth in consumer prices to offset the strong employment report.
A quick summary of foreign exchange action heading into Thursday shows that USD-CAD rose to a one-month high of 1.2754, lifted by the US dollar’s position as a currency of safety and falling oil prices that have negatively impacted the Canadian dollar.
Continued concerns about the rising COVID cases pushed oil prices down for a sixth straight day due to the demand concerns, but the outlook past the near-term is positive due to the high vaccination levels in the US and Canada.
EUR-USD fell to a nine-month low of 1.1666 as the dollar rose. Both the Federal Reserve and the European Central Bank remain on cautious footing, but a perceived shift in recent Fed comments, including the minutes released Wednesday, has given the impression the Fed will move to tighten policy first. As a result, the outlook for the pair remains to the downside.
The yen has remained underpinned on haven demand, but the US is getting the better of it, lifting the pair. Asia has a relatively low level of vaccination rate, which could lead to further lockdowns if the virus continues to spread, a negative for the Japanese economy and the yen.
The pound has been trading mixed at the lower end of the range, pushing GBP-USD to a one-month low of 1.3687. Risk-aversion does not favour the pound, but the high vaccination rate in the country is a positive for growth and will allow the Bank of England to tighten policy when conditions are right.
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Dollar Makes Steady Climb on Safety Bids, Fed Taper Advice
