FOREX FOCUS: FOMC Minutes Should Be Music To Dollar's Ears
04 Jan 2012 06:35 EST
By Nicholas Hastings LONDON (Dow Jones ia eFXnews)
Those FOMC minutes were good, not bad, news for the dollar.
Confirmation that the U.S. central bank will start to publish interest rate forecasts and that the forecasts will show policy remaining even lower for longer should really make the U.S. currency less attractive.
But, this doesn't take into account the rest of the world.
The primary reason for the Fed's reluctance to start tightening U.S. policy is uncertainty over the future of the euro zone and the risks that this poses to the U.S. as well as the global economy.
The Fed's cautious comments in the minutes of its last open market committee meeting contrasted with the optimism in financial markets as the new year started.
Strong data out of the U.S. as well as out of major Asian economies, including China, and even positive numbers out of Germany all helped to lift investor sentiment.
Strong purchasing managers indexes out of China were particularly heartening as they pointed to a return to economic expansion last month after a short-period of contraction.
However, this may not be enough to remove concerns about a slowdown in China's growth rate at the end of last year, especially if new real-estate figures showing a 0.25% decline in prices last month raise speculation of an early reduction in bank reserve requirements.
This is a key element of monetary policy management employed by Beijing, alongside interest rates, to regulate the pace of economic expansion.
Good news this week that German unemployment had fallen to the lowest level since unification will also be tempered by the fact that as healthy as the German economy looks now, the swift erosion of growth prospects in the peripheral debtor nations of the euro zone will eventually take its toll.
With France now succumbing to the need for further austerity measures and French consumer spending on the decline, Germany is likely to find itself alone among the core countries showing any real economic expansion.
And it is just this concern that is being reflected in the rather dovish minutes from the Fed.
In recent weeks, U.S. economic data have gone from strength to strength, suggesting that the recovery is now spreading to the previously flat housing and jobs markets.
Tuesday, the latest Institute of Supply Management survey showed an unexpectedly large rise in manufacturing activity back to levels seen last April.
This may have made the dovish Fed minutes even more surprising, but it also helps to explain why the minutes should be good for the dollar.
Not only will the forecasting of interest rates by the Fed provide some greater confidence in the future among U.S. corporations and consumers, but the outlook for further monetary accommodation, and even the introduction of more quantitative easing, will help to secure the U.S. economic recovery at a time when growth in many other major economies may not appear so sustainable.
And that, in the long run, can only be good news for the dollar.