📝 Fed Welcomes Dollar Strength to Tighten Conditions: ING FX Strategy

Key highlights from FOMC Minutes:

1. The Fed felt that the appreciation of the dollar was helpful in suppressing import prices and contributing to the Fed's objective of bringing inflation back to its 2% target. In other words, the Fed seems to welcome dollar strength and there were no linkages of dollar strength depressing any sectors in the US economy.

2. The Fed noted that the dollar had continued to strengthen in the inter-meeting period, especially against the euro. The Fed blamed the move on wider interest rate differentials. We see these interest rate differentials (two-year swap differentials) widening further into year-end and keeping EUR/USD pinned down near these 1.00/1.02 levels.

3. The Fed acknowledged the risk of tightening more than necessary - a risk that in effect justified slowing the pace of rate hikes and shifting to a more data-dependent approach. Within FX markets, selective high-beta, risk-sensitive currencies may perform a little better on the view that the Fed is shifting away from the period of more forceful adjustments in the policy rates

- ING FX Strategy