US Dollar Extends Gains as Fed Minutes Reinforce Hawkish Monetary Policy Outlook

FED MINUTES KEY POINTS:

• Fed minutes from the June meeting show that central bank officials believe that additional policy firming may be warranted to curb price pressures
• The account of the two-day session also reveals that policymakers are not entirely satisfied with the progress made on the inflation front
• The U.S. dollar extends gains as yields head higher

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The Federal Reserve today released the minutes from its June 13-14 conclave, at which the rate-setting committee voted by unanimous decision to keep borrowing costs between 5.00% and 5.25%, as part of a strategy aimed at buying time to better assess the cumulative impact of past policy firming.

According to the summarized record of the proceedings, almost all Fed officials saw inflation biased to the upside, unacceptably high and slowing less rapidly than anticipated. In addition, participants acknowledged that labor markets remain tight and that above-trend nominal wage growth may not be consistent with an overall price level of 2% over the longer term.

On economic activity, policymakers indicated that “growth” is likely to be subdued this year, but appeared more confident about the banking sector situation, noting that “stresses” in the system had receded compared to previous months. This may give the central bank cover to retain an aggressive stance in the near term.

In light of current economic conditions, most members judged that additional tightening would be warranted in 2023, a clear signal that policymakers may resume their hiking campaign at this month’s meeting after hitting the pause button in June.

Immediately after the minutes were released, the U.S. treasury yields extended their daily rally, as the tone of the document pushed interest rate expectations in a more hawkish direction. In this context, the U.S. dollar index (DXY) accelerated its advance, coming within striking distance from capturing its best levels in three weeks.

Looking ahead, traders should carefully monitor macro statistics closely. If incoming data confirms that the economy remains resilient, the FOMC is likely to press ahead with further hikes. This scenario could keep yields and the U.S. dollar biased upwards.

US DOLLAR VERSUS YIELDS CHART

Source: TradingView