US Dollar steady ahead of Federal Reserve minutes

Dollar steady as investors await Fed minutes
Dollar steady as investors await Fed minutes

by 5paisa Research Team Last Updated: Jan 03, 2023 - 05:04 pm 4.7k Views

The US Fed announces the minutes of the Federal Reserve meeting a full 3 weeks after the Fed statement. The Fed minutes are expected to be announced on Wednesday 03rd January 2023. The Fed minutes are expected to throw light on a number of things. Firstly, it is likely to throw light on the trajectory and pace of rate hikes. Secondly, the dot plot chart of the FOMC members will give an idea of the extent to which the Fed will stay hawkish on rates. For now, the Fed has indicated that another 3 rounds of 25 bps rate hikes could be on the cards, but then Fed has also put in a clause that it would not relent on rate hikes as long as inflation stayed elevated. That is where the minutes could throw more light.

One parameter that is being closely watched is the Bloomberg Dollar Index (DXY). The Dollar Index measures the dollar value against a basket of 6 major global currencies. For 2023, the enthusiasm and bullishness of 2022 is just not visible. In 2022, the Dollar index had rallied by 8%; the best rally since 2015. However, the dollar index has been off to a tepid start in 2023. It looks like most of the Fed hawkishness is already factored into the dollar index for now, which is not it may not be reacting too much. For now, investors are waiting in the side lines till the economic data, including the Fed minutes are announced. That would give a clearer understanding of what could be the Fed thinking on inflation and on interest rates.

In the year 2022, the rally in the dollar index was hardly surprising. The Fed had delivered 4 consecutive rate hikes of 75 basis points each followed by the last hike of 50 bps in December 2022. Between March 2022 and December 2022, the Fed had hiked rates by a full 425 basis points from the range of 0.00% to 0.25% all the way to the range of 4.25% to 4.50%. The clarity will be available when the minutes are put out on Wednesday. However, economists are of the view that the minutes could hint at a greater schism in the view of the members with members veering towards opposite directions, depending on the extent of hawkishness or the extent of dovishness.

Brokerage houses like Citi are pegging another 50 bps rate hikes in February, which would be more than expected. That could possibly give a much bigger boost to the dollar value and lead to the dollar index bouncing back above the 105 levels and possible once again trend towards the 110 levels. Among other data points, investors will also be looking at the payrolls report due to be released on Friday this week. However, it is not just the dollar, but other currencies are also strengthening and that could also have a bearing on the value of the dollar index. That could also have a bearing apart from the data flows.

For now, it is not just the Fed that is being hawkish, but even the Bank of Japan and the ECB are likely to tighten with higher rates to fight rising inflation. As long as the energy crisis persists, inflation is likely to be high and that would mean other central banks would also be tightening and eventually hardening their currency. The next few days could be interesting in terms of the movement of the US dollar.

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