Fed Minutes Support USD by Korman Tam

The greenback edged up higher against the majors in early US trading, firming to 1.4017 versus the euro and 117.48 against the yen before easing in the afternoon ahead of the FOMC monetary policy minutes. The currency market remains quiet as traders returned to their desks following the holiday to a dearth of fresh economic news.

The dollar continues to benefit from last week’s stronger than expected jobs data, which tempered expectations for further aggressive rate cuts from the FOMC. Nonetheless, we still expect the Fed to cut rates by 25-basis points at the end of October.

The minutes of the FOMC meeting revealed a unanimous decision to cut rates by 50-basis points to 4.75% due to the extremely weak conditions of the housing market, tighter financial conditions and their potential impact on the economy. Members expressed concern that a weaker economy would further exacerbate tightening credit conditions and reinforce the slowdown. Although members remained concerned about the upside inflation risks, the Fed is more confident a decline in inflation would be sustained. Also, the Fed sees further slowing of employment likely but labor markets should remain fairly tight.

St Louis Fed President William Poole reinforced sentiment from Friday’s payrolls report, saying the jobs data does not suggest the downside risks many foresee are materializing. He expects the housing market to remain weak for several more quarters and not stabilize until well into 2008. Poole remained uncertain over the duration for market turmoil, saying there was a substantial way to go. He added that the Fed has a responsibility to help maintain normal market processes but has neither the power nor the desire to bail out bad investments.

The US economic calendar remains light until the end of the week, with the reports to include TICS, trade balance, PPI, retail sales, and the University of Michigan consumer sentiment. We expect the dollar to remain within range this week, with traders likely to buy up the euro, sterling, and Aussie on dips. Markets will also focus on data released from the Eurozone, which will see GDP and industrial production.