USD: Fed Vice Chair Dudley provides some much needed support - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained on a stronger footing in the Asian trading session resulting in USD/JPY rising back above key support at the 100.00-level.

Key Quotes

“More hawkish than expected comments yesterday from Fed Vice Chair Dudley provided some much needed support for the US dollar which has been under downward pressure so far this month. Without the more hawkish Fed rhetoric the US dollar would likely have extended its recent decline undermined by the release yesterday of the softer than expected US inflation report for July.

In an interview with Fox News, Fed Vice Chair Dudley stated that his views on the US economy haven’t changed very much since a speech he made during July in which he suggested that rate hikes could resume as early as at the September FOMC meeting. He still expects growth to be stronger in the second half of the year and has been reassured that the labour market is still able to generate reasonable job gains which have averaged 190k/month over the last three months.

As a result, he believes that the Fed is “getting closer to the day we’re going to have snug up interest rates a little bit”. A September rate hike is viewed as “possible” but it will depend on how the data falls and where we are in terms of broad support for the economy. He does not expect the upcoming Presidential election to weigh the Fed one way or the other when setting appropriate monetary policy although did acknowledge that political uncertainty could already be contributing to weakness in business investment. 

He reiterated his previous warning that investors are “absolutely” getting too complacent about the possibility of further Fed rate hikes with the futures market basically pricing in only one rate hike by the end of next year. However, it was balanced by the comment that “we probably don’t have a lot of monetary policy tightenings to actually do over time”. It fits the views displayed recently by former Fed Chair Bernanke and San Francisco Fed President Williams that the natural rate of interest has declined meaning that monetary policy is less stimulative right now than previously assumed. Still, Fed Chair Dudley stated that he believed that it was premature to talk about raising the inflation target as suggested by San Francisco Fed President Williams.

The release tonight of the latest FOMC minutes will provide insight into the outlook for Fed policy. In the accompanying statement, the Fed upgrade its assessment of the US economy but did not provide a clear signal over the likely timing of the next rate hike. The tone of Fed Vice Chair Dudley’s comments has increased the risk that the market could view the policy discussion in the minutes more hawkishly than it did the accompanying policy statement. Still, the main event for US dollar direction in the near-term will be Fed Chair Yellen’s speech at Jackson Hole on the 26th August.”