Dollar Runs out, GBP Storms on
The US dollar was strong throughout New York trade on Wednesday but got an extra lift after the FOMC minutes. The report from the July 27-28 Fed meeting highlighted that 'many' Fed officials warned of the potential costs associated with yield caps and targets, including 'excessively rapid' balance sheet expansion along with the difficulty in making an exit.
The market emphasized that last point as the dollar jumped and risk trades ebbed. More than ever, the market has a gun to the Fed's head and doesn't want to hear anything but the sound of a printing press.
The minutes also said the US virus resurgence would slow H2 growth more than previously forecast and that business spending wasn't following the same positive pattern as consumers. On the latter point, US retailer target reported impressive sales growth in Q2 and said that sales strength has continued in July/Aug.
The reversal in the dollar stopped what looked like a breakout in the euro, pound and other currencies. Both broke out of ranges to multi-month highs on Tuesday but were sucked back to the range tops. Gold also abruptly reversed in a $75 drop.Is this a game-changer? It's not. The expectations for more Fed help are modest and none of the comments in the minutes raised the odds of tighter policy any time soon. Combined with stimulus uncertainty and high stock valuations, there is a chance of more trouble.
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