Dollar rises after Fed minutes reveal rate debate

NEW YORK: The dollar rose against the euro on Wednesday (Apr 8) after the minutes of the Federal Reserve’s last policy meeting showed a split over the timing of an interest rate increase.

According to the minutes of the Mar 17-18 meeting of the Federal Open Market Committee, “several participants” thought conditions were right for a June hike in the federal funds rate, stuck near zero since late 2008.

Others deemed the economy would not be able to weather a hike until later in the year, while “a couple” said liftoff would remain unlikely until 2016.

“After the FOMC meeting, people were convinced that the June rate hike was off the table, and the bottom line is between now and then,” said David Solin of Foreign Exchange Analytics. But the foreign exchange market “had jumped the gun by thinking that a June hike was off the table,” he said.

The dollar strengthened against the euro, pushing it down to US$ 1.0780 from US$ 1.0811 late Tuesday.

Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, said that the minutes had “a somewhat more hawkish tone than many were expecting, especially given the extent to which the Fed cut its forward guidance on growth and inflation at its March meeting.”

Carney’s BOE Majority Holds Firm on Heightened Euro-Area Risks

Mark Carney’s majority at the Bank of England hardened its view on interest rates this month, saying increased risks from the euro area mean it’s not yet time to begin raising borrowing costs.

Minutes of the Monetary Policy Committee’s October meeting published today showed officials voted 7-2 to keep the benchmark rate at a record low 0.5 percent.

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The MPC said pessimism about the global economy had increased and there was “mounting evidence of a loss of momentum in the euro area.” For Carney’s majority, that “increased the risks to the durability of the U.K. expansion in the medium term.” In contrast, Martin Weale and Ian McCafferty said a rate increase was justified and the economy had so far “not been affected by damaging financial contagion” from its biggest trading partner.

The tone taken by the majority raises the probability that rates will be kept on hold for longer, after BOE Chief Economist Andy Haldane said last week that market expectations for the first increase to come in mid-2015 are “not a bad bet.” Haldane also said the international growth outlook and a lack of domestic inflation left him “gloomier.”

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Investors have pushed back bets for the first rate increase to September 2015 from May at the time of the BOE’s meeting last month, futures contracts show.

Low Inflation

“The majority opposing early hikes are becoming more entrenched,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “The overall hawkish drift within the committee in previous months has been halted.”

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U.K. inflation slowed to 1.2 percent in September, staying below the central bank’s 2 percent goal for a ninth month. Economic growth probably cooled to 0.7 percent in the third quarter from 0.9 percent in the three months through June, economists said before data due on Oct. 24.

“While the economy had been growing sufficiently quickly to absorb some of the slack in the economy, there were some signs that the pace of growth was beginning to ease,” the MPC majority said in the minutes.

The pound extended its decline against the dollar after the minutes were published and was 0.5 percent lower at $ 1.6038 at 10:39 a.m. London time.

While the majority said there was “insufficient evidence of prospective inflationary pressure” to justify raising interest rates, Weale and McCafferty disagreed and wanted a 25 basis-point increase. They said circumstances warranted tighter policy and that keeping the key rate at its current level for too long “risked unbalancing the recovery.”

The minority also said surveys indicated there could be a sharp pickup in wage growth as slack is absorbed and that it made sense for the MPC to “anticipate” labor-market pressures.

Even after a quarter-point increase, “monetary policy would remain extremely supportive,” they said. “An early rise would facilitate the committee’s aspiration that any subsequent rises in bank rate should be only gradual.”

To contact the reporters on this story: Emma Charlton in London at [email protected]; Scott Hamilton in London at [email protected]

To contact the editors responsible for this story: Fergal O’Brien at [email protected] Eddie Buckle

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BOE Splits on Rate as Majority Sees Mounting Euro-Area Risk

Mark Carney’s majority at the Bank of England hardened its view on interest rates this month, saying increased risks from the euro area mean it’s not yet time to begin raising borrowing costs.

Minutes of the Monetary Policy Committee’s October meeting published today showed officials voted 7-2 to keep the benchmark rate at a record low 0.5 percent.

The MPC said pessimism about the global economy had increased and there was “mounting evidence of a loss of momentum in the euro area.” For Carney’s majority, that “increased the risks to the durability of the U.K. expansion in the medium term.” In contrast, Martin Weale and Ian McCafferty said a rate increase was justified and the economy had so far “not been affected by damaging financial contagion” from its biggest trading partner.

The tone taken by the majority raises the probability that rates will be kept on hold for longer, after BOE Chief Economist Andy Haldane said last week that market expectations for the first increase to come in mid-2015 are “not a bad bet.” Haldane also said the international growth outlook and a lack of domestic inflation left him “gloomier.”

Investors have pushed back bets for the first rate increase to September 2015 from May at the time of the BOE’s meeting last month, futures contracts show.

Low Inflation

“The majority opposing early hikes are becoming more entrenched,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “The overall hawkish drift within the committee in previous months has been halted.”

U.K. inflation slowed to 1.2 percent in September, staying below the central bank’s 2 percent goal for a ninth month. Economic growth probably cooled to 0.7 percent in the third quarter from 0.9 percent in the three months through June, economists said before data due on Oct. 24.

“While the economy had been growing sufficiently quickly to absorb some of the slack in the economy, there were some signs that the pace of growth was beginning to ease,” the MPC majority said in the minutes.

The pound extended its decline against the dollar after the minutes were published and was 0.5 percent lower at $ 1.6038 at 10:39 a.m. London time.

While the majority said there was “insufficient evidence of prospective inflationary pressure” to justify raising interest rates, Weale and McCafferty disagreed and wanted a 25 basis-point increase. They said circumstances warranted tighter policy and that keeping the key rate at its current level for too long “risked unbalancing the recovery.”

The minority also said surveys indicated there could be a sharp pickup in wage growth as slack is absorbed and that it made sense for the MPC to “anticipate” labor-market pressures.

Even after a quarter-point increase, “monetary policy would remain extremely supportive,” they said. “An early rise would facilitate the committee’s aspiration that any subsequent rises in bank rate should be only gradual.”

To contact the reporters on this story: Emma Charlton in London at [email protected]; Scott Hamilton in London at [email protected]

To contact the editors responsible for this story: Fergal O’Brien at [email protected] Eddie Buckle

Euro Slides Further As Central Bank Policies Diverge

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The euro lost even more ground on Thursday after the U.S. Federal Reserve suggested that it was planning to raise interest rates sooner than expected on Wednesday.

The common currency traded at $ 1.3268 at 8:00 GMT on Thursday morning as investors saw the European Central Bank’s monetary policy diverging further and further from that of the Fed.

Rate Hike Coming

On Wednesday, the U.S. Federal Reserve suggested that the strong comeback in the American labor market could lead to a sooner than expected rate increase. Reuters reported that minutes from the Fed’s July meeting showed that U.S. central bankers were on the fence about a rate increase, with most opting to hold off until economic data warranted the hike.

Related Link: Euro Remains Under Pressure

The minutes revealed that several central bankers agreed that the U.S. job market has been improving faster than expected. Most are expecting the bank to maintain the current interest rates until the beginning of 2015 as the Fed slowly tapers its asset purchasing program. However, once the purchases have ended, it is unclear how long the bank will wait to raise its main interest rate.

Euro Under Pressure

Meanwhile, the eurozone is still enduring a sluggish economic recovery as sanctions against Russia continue to weigh on the bloc’s forward progress.

On Wednesday, French President Francois Hollande voiced his concerns about the strength of the euro, saying that the common currency is still overvalued. Recently, the French economy has been struggling with record high unemployment figures and low industrial output and housing starts. According to Hollande, the strong euro is keeping the region from being competitive in the global market, and thus further stifling the bloc’s already fragile recovery.

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Pound Holds Two-Day Gain Versus Euro Before BOE Inflation Report

The pound strengthened a third day versus the euro as investors prepared to mine the Bank of England’s quarterly Inflation Report for guidance on when the bank will start to increase interest rates.

U.K. government bonds fell before central bank Governor Mark Carney presents the report, which will also include the institution’s updated economic projections. While Carney said in a June speech at Mansion House that the BOE may raise its key interest rate from a record earlier than investors expected, he since softened that stance. Last month he said that any increases in interest rates will be determined by the data.

“The market will be using the Inflation Report to second-guess the timing and extent of U.K. rate hikes,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. “Since his Mansion House speech, Carney may be quite conscious of the power of his hawkishness. We are seeing this come through now as he makes references to not wanting to rock the boat of U.K. recovery.”

McDarby said although he is calling for the pound to “remain lower, testing through $ 1.6750 to $ 1.6720, a hawkish Carney would no doubt result in us having to re-evaluate that short-term view.”

Best Performer

The pound strengthened 9.8 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes, as investors brought forward their expectations for the BOE’s first interest-rate increase since 2007. Even so, it’s fallen 0.3 percent in the past month amid signs the U.K. economy is falling short of analysts’ expectations.

The pound gained 0.2 percent to 79.39 pence per euro as of 8:17 a.m. London time after appreciating 0.5 percent in the previous two days. Sterling was little changed at $ 1.6821 after dropping to $ 1.6757 yesterday, the least since June 11.

Citigroup Inc.’s Economic Surprise Index for the U.K., which shows whether data beat or fell short of economists’ forecasts, was at minus 7.1 yesterday, below zero for a ninth day and down from this year’s high of 37.1 set in February.

U.K.’s unemployment rate declined to 6.4 percent in the three months through July, from 6.5 percent previously, the Office for National Statistics will say today, according to the median estimate of economists in a Bloomberg News survey. Average weekly earnings dropped 0.1 percent in the three months through June, the first decline since May 2009, according to a separate Bloomberg survey.

Rate Expectations

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are speculating that U.K. borrowing costs won’t increase by a full 25 basis points until February. In his May Inflation Report, Carney said slack remained in the economy, an assertion that pushed back expectations for the first rate increase to April, from as soon as February the day before the report.

The pound has declined against the dollar for the past five weeks, the longest run since 2012. That increases the chance of a rally in the pound on any hints of an earlier-than-expected rate increase, Simon Smith, chief economist at FXPro Group Ltd., wrote in a note yesterday.

“Over the past two years, the daily cable range on Inflation Report days has been nearly twice the normal daily average,” he wrote, referring to the pound-dollar currency pair. “With the market clearly short sterling, the risk is skewed towards short-covering on anything other than a decidedly dovish outcome.”

BOE Minutes

Bank of England policy makers maintained their key interest rate at a record-low 0.5 percent last week. Minutes of the Aug. 6-7 meeting, which will show whether the decision was unanimous, will be released on Aug. 20.

The U.K.’s 10-year gilt yield rose three basis points, or 0.03 percentage point, to 2.51 percent after falling to 2.40 percent on Aug. 8, the lowest since August 2013. The 2.25 percent bond due in September 2023, fell 0.205, or 2.05 pounds per 1,000-pound face amount, to 97.915.

Gilts returned 5.7 percent this year through yesterday, Bloomberg World Bond Indexes show. That compares with a gain of 6.2 percent for German securities and 3.7 percent for Treasuries.

To contact the reporters on this story: Alexa Liautaud in London at [email protected]; David Goodman in London at [email protected]

To contact the editors responsible for this story: Paul Dobson at [email protected] Keith Jenkins, Todd White

Soccer Fans Driving Up Polish Prices Clouds Rate Outlook – Bloomberg

“Another rate increase by a quarter point in July is quite likely.” Poland’s policy makers are also keeping an eye on a weakening currency that’s driving up import costs. The zloty lost 4.9 percent against the euro in May, the worst …

Polish Rate Increase in July Is Very Likely, Glapinski Says – BusinessWeek

Polish Rate Increase in July Is Very Likely, Glapinski Says
BusinessWeek
Poland's economy is set to grow at the European Union's fastest pace this year according to the European Commission, which helped convince central bankers to support the first rate increase in the 27-nation bloc this year as the euro area struggles

and more »

Yen Drops Most in 2 Months Versus Euro on Stimulus Wagers – Businessweek

It gained 0.7 percent to 81.97 pence per euro. The Canadian dollar had the biggest advance versus its U.S. counterpart in seven weeks. Policy makers said on April 17 an interest-rate increase “may become appropriate” as the economy recovers.

ECB Chief Stresses Euro-Zone Inflation Risk – Wall Street Journal

without suggesting that an interest-rate increase is near. His hawkish emphasis on inflation risks suggests the central bank doesn’t plan to take further steps against the mounting probability of a renewed recession in the euro zone. Instead …

Polish Rate-Increase Chances by July Rising, Bratkowski Says – BusinessWeek


Financial Times

Polish Rate-Increase Chances by July Rising, Bratkowski Says
BusinessWeek
It's “fairly unlikely” that inflation will return to the goal without rate increases, Bratkowski said. The zloty fell to 4.1808 against the euro as of 4:50 pm in Warsaw from 4.1701 yesterday. The central banker's views contrast with comments made
Zloty on the reboundFinancial Times (blog)

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