Dollar pinned above 6-1/2 month lows, Fed minutes in focus

The U.S. dollar slipped on Wednesday, after minutes of the latest Federal Reserve meeting showed policymakers agreed they should hold off on raising interest rates until they see evidence that a recent economic slowdown was transitory.

While the yield curve flattened, the S&P 500 closed at a record high after minutes from the US central bank's May 2-3 policy meeting indicated the Fed would gradually raise rates and wind down its $4.5 trillion of bond holdings.

The minutes of the Fed's March meeting, which were released April 5, indicated that policymakers believed the time had almost come to begin shrinking the central bank's bloated balance sheet, which would act as a monetary tightening.

The minutes also contained details of how the Fed might reduce the massive $4.5 trillion balance sheet it accumulated by purchasing Treasury and mortgage-backed securities during the recession.

The process comes as the Fed embarks on a gradual path toward normalizing interest rates. Officials themselves acknowledge that they are less sure about the impact of a reduction in asset holdings on financial conditions than they are with the more familiar tool of an interest rate increase.

After it met early this month, the Fed left its key policy rate unchanged after having raised it at its December and March meetings. Typically, a sell-off of the Fed's bonds would gradually ripple through the economy and force up many borrowing rates. But another is that investors just received an unexpectedly concrete sense of the Fed's methodology for unwinding its balance sheet, and it clearly indicates moving at a glacial pace.

Ed Keon, managing director and portfolio manager at QMA, said the release was as expected, but he also said the Fed gave itself an out for June.

Dollar pinned above 6-1/2 month lows, Fed minutes in focus

"Gold could face more pain if tonight's [Federal open market committee] minutes show that the Fed is on course for two to three more rate hikes this year", said Jeffrey Halley, a senior market analyst at Oanda.

Fed officials say the economy also is expected to see a boost from overseas demand for U.S. exports, as "the risks stemming from global economic and financial developments" have "receded further", the minutes said.

The Fed raised rates for the first time in December 2015 and has followed with two more modest increases, in December previous year and then in March.

With America coming up on 8 years of economic expansion, the Fed's medicine isn't needed as much.

Policy makers have also said they would like to start shrinking their bloated balance sheet by year-end, a move that may lift longer-term borrowing costs and dampen growth.

U.S. Federal Reserve members appear to be on the same page on to unravel the mammoth stimulus implemented during the 2008-09 financial crisis.

  • Zachary Reyes