The release of the minutes of the FOMC meeting supported the market's expectations for a Fed rate hike in March 2022, so that the US dollar exchange rate strengthened again.
The US dollar index (DXY) was steady around the 96.30s in Thursday's trading (6/January). The release of the minutes of the FOMC meeting this morning echoed market expectations for a faster Fed rate hike, so the greenback strengthened against most major currencies.
AUD/USD is down about 0.9 percent to the 0.7160s, while GBP/USD is down 0.4 percent to the 1,350s. The New Zealand dollar, Canadian dollar, euro and Swiss franc were also under pressure against the US dollar. Only USD/JPY is showing the opposite performance with a decline of around 0.25 percent to the 115.80s range, possibly because the previous strength has been excessive.
Minutes of the December 14-15, 2021 FOMC meeting revealed that Fed officials view a "very tight" labor market as allowing for faster rate hikes to tame inflation. They also signaled a willingness to implement Quantitative Tightening (QT), i.e. reducing the number of assets on the Fed's balance sheet that had been purchased during the Quantitative Easing program.
The market had previously priced in a bigger chance for the first "Fed rate hike" in May and only half a chance for March. However, following the release of the minutes of the FOMC meeting, the Fed Funds Rate immediately indicated an 80% chance for a 25 basis point rate hike at the FOMC meeting in March.
“With the odds for a rate hike in March increasing and the threat of QT this year, the USD should maintain its resilience,” TD Securities strategists said in a report cited by Reuters, “This should support USD/JPY in the longer term, although we think the Fed a very hawkish one could cause a near-term disruption for risk (asset) markets."
It is also worth noting that the December FOMC meeting participants fully agreed on the importance of starting interest rate hikes in 2022. In fact, the minutes of the September FOMC meeting still showed differences of opinion, although the majority supported the discourse.
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