Dollar Firms Ahead of Fed Minutes

The dollar index hovered around 97.7 on Thursday after surging in the previous session, as strong US economic data and surprise hawkish signals from the Federal Reserve buoyed the currency. Minutes from the Fed’s latest meeting showed policymakers were split on the path for US rates, suggesting that the next chairman could face challenges in implementing rate cuts. Several participants also favored language that would have explicitly left open the option of raising the federal funds rate should inflation remain above target. Traders slightly trimmed expectations for Fed rate cuts this year but still anticipate two 25 bps reductions before year-end. The greenback was further supported by data showing US industrial production rose at its fastest pace in nearly a year, core capital goods orders exceeded forecasts, and housing starts reached a five-month high. Investors now turn to the upcoming jobless claims., PCE inflation and GDP reports for additional guidance on the rates outlook.

The dollar index firmed to above the 97.5 mark on Wednesday, extending the traction since touching a near four-year low of 96 in late February as global markets reconsidered their aversion to the greenback and trimmed the magnitude of rate cuts expected by the Federal Reserve this year. Minutes from the Fed's last meeting indicated that many members believe that the disinflation process may take longer than previously expected, while few members went as far as noting that rate hikes could be necessary to prevent the inflation rate from stabilizing above the 2% target. The delayed January CPI reflected a 2.4% annual increase, less than expected, but remained firmly above target. Meanwhile, the aversion to dollar-denominated assets eased from their peak in late January amid signs of improved relations between the US and the EU and the nomination of the Fed Chairmanship to Kevin Warsh, a balance sheet hawk. The DXY was also supported by a softer sterling, yen, and Canadian dollar.

The dollar index climbed above 97 on Wednesday, as investors weighed strong US economic data and awaited minutes from the latest Federal Reserve meeting. Housing starts and building permits for December beat expectations, pointing to improving builder confidence, while durable goods orders fell less than forecast and core capital goods orders rose 0.6%, exceeding estimates. Markets are now looking for clues on interest rate direction, with money markets pricing in about 57 basis points of cuts this year, roughly two reductions and a small chance of a third. Markets are also focused on Friday’s release of the PCE Price Index, the Fed’s preferred inflation metric. In addition, GDP data due later this week is expected to confirm another quarter of economic expansion. On the geopolitical front, the US and Iran reached an understanding on key “guiding principles” during a second round of indirect talks over their nuclear dispute.