Dollar steady in tight ranges - Financial Mirror

Dollar steady in tight ranges

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The dollar remained steady confined to tight ranges on Tuesday as investors turned to U.S. economic data for clues on whether the currency has room to rise further. Traders also wary of regional security concerns after media reports that U.S. spy satellites had detected activity that may signal North Korea is preparing for another nuclear test. U.S. intelligence confirmed on Monday that Pyongyang had conducted an underground nuclear test last week.

Traders said the dollar stayed well-supported on signs the U.S. economy may not be slowing as fast as some had thought, leading to reduced market expectations that the Federal Reserve will cut interest rates early next year.

The euro was nearly flat on the day at $1.2535 after having hit $1.2484 on Friday, the weakest since July. The euro was little changed at 149.20 yen.

For clues about the health of the euro zone economy the market was awaiting the ZEW institute readings for German economic sentiment in October, a month after the expectations component plunged unexpectedly to its lowest level in nearly eight years.

The dollar fell broadly on Monday as market players booked profits from last week’s rally, while the yen got a brief boost after Russia’s central bank said that it had started buying the currency to boost the share of the yen in its reserves.

Japanese Finance Minister Koji Omi said on Tuesday that he welcomed Russia’s decision, prompting light yen buying that pushed the dollar/yen to the day’s low around 118.95 yen.

A chorus of Fed officials has voiced concerns about inflation risks, though top officials who spoke on Monday offered few fresh clues on the outlook for the economy and inflation.

The minutes from the Sept. 20 meeting released on Wednesday showed that Fed policy-makers remained “quite concerned” about inflation risks and renewed their commitment to control inflation pressures.

FED minutes have come in hawkish and while the FED acknowledged that ‘economic activity has continued to decelerate’ it noted that there were substantial upside risks in its inflation outlook. Moreover, by indicating that real disposable income was increasing with ‘solid gains in June and July’ it left the impression that it does see the housing slow down as an isolated event not at risk of affecting the economy too much at this stage. However, by suggesting that a ‘significantly more sluggish outcome could not be ruled out’ it signalled that it understands the downside risks of the economy. On the other hand FED members ‘emphasized that they continued to be quite concerned about the outlook for inflation,’ even amid declines in energy prices, some improvement in core inflation, still contained inflation expectations, and forecasts for moderation in growth.

The market’s reading of the minutes is that the FED is pausing for a prolonged period of time. The US money market curve has flattened out further and while a last week the market was pricing in an 80% probability of the FED cutting rates in March, the market has reduced that probability to below 20%. With FED Funds Futures suggesting that US rates are likely to remain broadly stable within the next half year while carry trade investors will continue buying USD’s against lower yielding currencies.