What Drop In Yields Ahead Of Fed Minutes Means For Dollar

The June FOMC meeting minutes is one of this week’s key event risks. The Federal Reserve grew less dovish last month by opening the door to the discussion of reducing asset purchases but since then disappointing U.S. data has investors questioning the timing of taper and ruling out an interest rate hike. Although Friday’s non-farm payrolls report showed the strongest job growth in 10 months, average hourly earnings and the jobless rate fell short of expectations. Today, the Institute of Supply Management reported a slowdown in service sector growth with their non-manufacturing index falling from 64 to 60.1. This was not only weaker than anticipated but the worse reading in 4 months.

U.S. dollar banknote with map

Image Source: Unsplash

Yet the dollar’s losses were limited to the Japanese Yen as the greenback traded higher against the euro and other major other currencies. With the Dow Jones Industrial Average falling 200 points, renewed risk aversion drove investors out of risky currencies. However, the 5% drop in 10-year Treasury yields will make it difficult for the dollar to extend its gains even if stocks continue to fall. Between weaker U.S. data and the Fed’s desire to temper hawkish bets, the Fed minutes could sound more cautious and balanced than the FOMC statement and Fed projections. The sell-off in Treasury yields are a sign of bond investors positioning for less hawkishness. With USD/JPY peaking at 14-month highs after non-farm payrolls, less hawkish FOMC minutes could also take USD/JPY to 110 and renew the greenback’s rally against other currencies.

The sell-off in the euro was compounded by weaker Eurozone data. Although retail sales rose slightly more than anticipated, the German ZEW survey plunged from 79.8 to 63.3, a year-to-date low. Economists anticipated a more modest decline to 75.2. The Eurozone ZEW index also experienced a steep decline from 81.3 to 61.2 while German factor orders turned negative. This was the second straight month that Germany’s ZEW economic expectations index declined but instead of expressing concerns about the drop, ZEW President Wamach said “The economic development continues to normalize. The situation indicator for Germany has clearly overcome the coronavirus-related decline. Although the ZEW indicator of economic sentiment has once again fallen significantly, it is still at a very high level.”

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