NY Session: Greenback Weaker Amid FOMC Minutes, Fed Speak

The dollar was under pressure as risk sentiment continued to improve amid the release of the FOMC minutes and speeches from key officials. High beta currencies (AUD,NZD,CAD) outperformed as equities surged (DJIA finished up about +0.90% and S&P 500 closed higher by around +0.97%). The only G10 currency that was weaker against the buck was the yen as USD/JPY broke out of its recent range with a sharp rise on rumors that Japan has built an FX intervention fund and will try to gain approval at the upcoming G20 meeting to act in the currency markets. USD/JPY broke above the 55-day sma and looks set for a daily close above the moving average for the first time since early July.

The euro was given a boost as European Commission President Barroso outlined proposals which called for a coordinated approach to strengthen banks. He said that banks should boost their capital ratio and use private sources of capital before tapping government funds. EUR/USD rose towards the pivotal 1.3850 level (the 50% bounce of the decline from Aug. highs to Oct. lows) before correcting lower to current levels of around 1.3795.

FOMC minutes of the Sept 20-21 meeting were released and showed that members saw QE3 as a “more potent tool that should be retained as an option” if further policy action to support the recovery was warranted. The Fed also discussed cutting the interest rate on reserves as another option before deciding to shift the duration of its holdings to longer-term Treasuries. On inflation, the minutes showed that while ‘inflation appeared to have moderated’ it had “not yet come down as much as participants has expected earlier”. The minutes noted the elevated unemployment rate and continuing weakness in overall labor market conditions. FOMC members said they expected a pickup in the pace of recovery and that the slow growth didn’t signal a contracting economy.

Fed speakers today included Cleveland Fed President Pianalto, and dissenters Philadelphia Fed President Plosser and Dallas Fed President Fisher. Plosser said that he does not believe we are on the verge of a double-dip and expects the economic recovery to “gradually accelerate” and that the European crisis poses the “greatest uncertainty” to growth. The Fed’s Fisher said that the Fed has done everything it can and that fiscal authorities “are the problem” now. Pianalto reiterated her support of current policy saying that the Fed is “running the appropriate monetary policy based on the outlook” for growth and inflation.

On the data front for the upcoming Asia/Pacific session are NZ food prices for Sept., the Sept. NZ business PMI and Sept. employment figures are due out of Australia. Japan is set to release the Tertiary industry index for Aug. and bank lending figures for Sept. while China sees Sept. trade balance data and 3Q confidence indicators.