The US Dollar has been stabilizing since early- to mid-August after a precipitous decline the mid-March Covid outbreak peak. The selloff reflected ebbing safety-minded buying as the Fed’s expansive stimulus effort – most notably, an open-ended QE program – cooled credit market stress and revived risk appetite. The slide found a floor as the US central bank signaled a pivot toward wait-and-see mode.

Tellingly, the Greenback found a floor just as the yield advantage enjoyed by benchmark 10-year US Treasury bonds against major international alternatives began to cautiously expand. The slope of the US yield curve steepened in tandem, signaling that investors’ Fed monetary policy outlook was beginning to move away from dovish extremes.

This transition is consistent with a palpable pivot in policymakers’ rhetoric. Fed Chair Jerome Powell and company have argued that – while they have no intention of tightening in the near term – there is little that monetary policy can do to counter the loss of economic activity disrupted by lockdowns aimed at containing the coronavirus outbreak.

The narrative is compelling. While the Fed can ensure that credit markets remain amply supplied with liquidity, it cannot force borrowing to finance a pickup in demand to actually occur. Mr Powell and his colleagues have routinely called on fiscal authorities to step into the breach. Government spending is able to at least in part replace lost private-sector activity. Monetary policy cannot.

US DOLLAR MAY RISE ON FOMC MEETING MINUTES
This logic is not altered by slowing economic recovery amid another upswell in viral cases and the follow-on reinstatement of lockdowns of varying severity across the US, nor the ongoing deadlock in fiscal stimulus negotiations. Indeed, PMI survey data due next week is expected to show that manufacturing- and service-sector activity growth slowed in November.

With this in mind, the upcoming release of minutes from this month’s FOMC meeting may inspire US Dollar gains. If policymakers again assert that there is little to be done for monetary policy besides the management of credit costs, this seems likely to sour risk appetite – reviving demand for haven assets including the Greenback – even as it underpins relative yield-based support for the bellwether currency.

Reference by: Ilya Spivak, Head Strategist, APAC at DailyFX.com