Dollar Bulls Wary After Cautious Fed Comments

On Tuesday the dollar hovered near a two-week low against its peers as cautious comments by officials of Federal Reserve over the global outlook and weak data at home raised questions over whether the U.S. central bank will slow down its rate increases.

Overnight, New York Fed President John Williams told a Q&A event that “We will be likely raising interest rates somewhat, but it is really in the context of a very strong economy.”

Williams noted that the Fed is not on a pre-set course and will adjust monetary policy to keep the economy strong with low inflation.

Last week, Fed Vice Chair Richard Clarida and Dallas Fed President Robert Kaplan raised concerns over a potential global slowdown that has seen markets betting heavily that the rate-hike cycle is on its last legs, even as the senior Fed officials signalled more interest rate increases.

The Fed executives’ remarks led some traders to question whether the dollar’s rally was nearing its end, with the benchmark U.S. 10 year treasury yields pulling back slightly.

The dollar index, a gauge of its value versus six major peers, traded marginally lower at 96.17 on Tuesday. The index fell nearly half a percent last week, its biggest weekly drop since late September.

However, some analysts believe the dollar can stage a comeback.

“William’s comments are justified but are not as dovish as the comments made by Clarida and Kaplan last week. The market may rethink whether it read Friday’s comments as overly dovish which may lead to a reversal in dollar weakness,” said Ray Attrill, head of currency strategy at NAB.

Attrill added that safe-haven buying can return to the dollar if global equities keep correcting and their volatility continues to rise.

“If we see the VIX (volatility index) at 25, I would expect the dollar to pick up steam.” The index is currently at 20.10.

Economists still expect the Fed will raise interest rates again next month and three times next year, but a strong majority say the risk is it will slow that pace down. The greenback was also weighed by surprisingly weak housing data, which pushed down U.S. 10 year bond yields.