US dollar capped its losses Thursday after tumbling over 1% on the release of the FOMC meeting minutes.
The US dollar regained its composure on the Fed minutes release which raised expectations that the central bank could slow the pace of interest rate hikes in December. The dollar index remained relatively unchanged at 105.85 after declining over 1% Wednesday.
Dollar Index Down and US Stocks Rise on the Latest Fed Minutes
The US dollar recovered control and remained almost unchanged Thursday after plunging more than 1% Wednesday after the minutes of the Fed’s November meeting reinforced the central bank’s plans to slow the pace of interest rate hikes next month. This means that a 50 basis points (bps) rate hike is more likely in December, following four consecutive 75 bps increases.
“The Fed will be happy to move rates by 50 basis points in December and 25 basis points from the first meeting next year. As long as the Fed see a stronger labour market, they don’t have a big concern about tightening.”
– Niels Christensen, chief analyst at Nordea
The dollar index, which measures the US dollar’s strength against a basket of currencies, is trading at 105.89, down just 0.17% in the past 24 hours after taking a beating a day earlier. US equities rose on the Fed minutes readout, with the S&P 500 rising almost 0.6% and the Nasdaq Composite jumping 0.99% Wednesday.
US Dollar On Track to Record Worst Monthly Performance in 12 Years
The US central bank has delivered six consecutive interest rate hikes in 2022 to combat the highest inflation in 40 years. However, inflationary pressures slightly eased in October, fueling hopes of a slower pace of rate hikes going forward.
The improved investor sentiment has weighed on the dollar index, which is down more than 5% in November, heading for its worst monthly performance in 12 years. This marks a sharp U-turn for the greenback after hitting a 20-year high earlier this year.
“There are not that many dollar buyers around these days after the correction higher in euro-dollar in the first half of November,” Nordea’s Christensen added.
– added Christensen.
While the consensus suggests that interest rates will keep rising at a slower rate, analysts at Citi warned there is still significant uncertainty around how high rates could increase. The minutes of the latest meeting also revealed an emerging debate within the central bank over potential risks that tight policy could pose to US economic growth and financial health. On the other hand, the Fed officials also conceded that inflation remains too high and that interest rates must be increased further.