Hey, U.S. Dollar, "Don't Fight the Fed" Means You, Too

"As frequent data flip-flops cloud the global economic and policy outlook, the [foreign exchange] option market has found a way around the uncertainty. All action is now centered around upcoming monetary-policy announcements."

Thus writes foreign exchange and interest rate strategist Vassilis Karamanis for Bloomberg today (emphasis mine).

But it's not just the foreign-exchange option market, Vassilis; the observation holds for all asset markets. Seven years after the failure of Lehman Brothers, central banks retain the exalted status in financial markets that they achieved through their role in combating the financial crisis.

Yesterday, the Fed had something to feed the markets with the release of the minutes of its September monetary policy meeting. The market appears to have concluded that the minutes were bearish for the dollar, as the dollar has fallen to a three-week low against the euro and to a low for the month against the Canadian dollar (the European Union and Canada are the U.S.' two largest trading partners):

Source: Bloomberg.

Every time policymakers made mention of the dollar other than to note its rise, it was to highlight its adverse effect on inflation, inflation expectations, or economic activity. Here are half of those mentions:

Effects on economic activity

In particular, the appreciation of the dollar since mid-2014 was still a substantial drag on net exports, and the further rise in the dollar over the intermeeting period could augment the restraint on U.S. net exports. ...

But the appreciation of the dollar was still restraining production of goods for export. ... And the appreciation of the dollar also continued to weigh on activity in the energy and agricultural sectors.

Effects on inflation and inflation expectations

Still, almost all participants anticipated that inflation would continue to run below 2 percent in the near term, particularly in light of the further decline in oil prices and further appreciation of the dollar over the intermeeting period. ...

Market-based measures of inflation compensation fell to near their historical lows, reportedly in response to the recent appreciation of the dollar, the decline in oil prices, and ..."

The market consensus is that the tone of the minutes was dovish, i.e., moving away from a 2015 rate increase (although individual Fed policymakers continue to signal that a hike this year is still a good possibility, if not in the cards). A later rate rise is bearish for the dollar, as a lower deposit rate makes it relatively less attractive.