Yen Weakens as Dollar Strengthens After FOMC Dudley's Speech

20 June, 2017

The US dollar was much stronger after NY Fed President William Dudley clearly stated that he is confident in the US economy. He expressed that the US economy is close to full employment and as the labour market tightens, the economy will see inflation get back to 2%.

President Dudley also observed that the four rate hikes haven’t significantly tightened financial conditions yet. The financial conditions in the graph below can be seen to be still at or near the loosest levels since the Global Financial Crisis of 2009. This also means that the Fed will have enough room to raise rates even further without making the economy go into recession.

The President’s comments seemed to have a significant effect on USD/JPY, as Japan is the only country that is not going to start implementing more tight policies any time soon. As a result, JPY was the weakest currency in the G10 currencies overnight.

It is important to note the quite strong performance of the Canadian dollar despite another fall in the oil price. Wilbur Ross, the US Commerce Secretary said that Canada and Mexico do not have a tendency to manipulate their currencies and that soon after NAFTA is renegotiated, “there’s a good chance that both their currencies will strengthen because of removing the uncertainty from their picture.” However, he also added that the NAFTA talks might not even happen anytime soon, or even this year.

Again, today seems to have a light schedule. Fed Vice Chair Stanley Fischer is the keynote speaker at a conference in Amsterdam on macroprudential policy. Even though he isn’t expected to talk about monetary policy, it is important to listen to his views and comments, too.

Eric Rosengren, the Boston Fed President, is also speaking at the same conference in Amsterdam with his speech title being: “Bad Zero: Financial Stability in a Low Interest Rate Environment.” Again, Rosengren may not focus his speech on monetary policy but still, there could be some opportunities for him to discuss this topic as it is a great market concern.

The current account balance in the US has been a market moving indicator before and this is expected to move the market even more now that the Trump administration is focusing so much on trade. Even though the expected figures show a wider deficit than in the months before, it is in fact narrower than necessary to keep the 4-quarter moving average steady. In other words, this means a slight improvement which could in fact effect the dollar in a positive way.

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