How FOMC Voter Bullard Instilled Hope for the Dollar

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The U.S. dollar is trading higher against all of the major currencies this morning on the back of comments from Fed President and FOMC voter James Bullard. Thanks to Bullard we don’t have to wait for the Fed minutes to get a better sense of how tough the decision to maintain asset purchases this week really was. According to Bullard, the decision was a close one because tapering “by $10 billion is not a big deal.” In other words, the central bank felt that by reducing asset purchases by only $10 billion, the impact would be so nominal that they might as well decide to keep QE policy unchanged to give the economy its best chance of recovery for the next few months. In addition to admitting the decision was a borderline call, Bullard left the door open for tapering in October. After holding policy steady, few investors considered next month as a viable option but Bullard made it clear that they are flexible and could hold a special press conference after the October meeting if needed.

What Bullard is telling us today is that the Fed is keeping all of their options open and despite Wednesday’s decision they are still very close to slowing asset purchases and when the reduction is made, it should between $15 billion to $25 billion, an amount they feel will put a significant dent into their overall program. So the dialogue about tapering asset purchases this year hasn’t ended and in fact economists are divided on whether the first reduction would occur in December or early 2014. We should get more clarity on the FOMC’s position over the next week because now that the central bank meeting is over, the quiet period before FOMC has ended and a number of Fed Presidents are scheduled to speak. Today alone, we expect to hear from Fed President George, Tarullo and Kocherlakota. All 3 are voting members of the FOMC with George a bit more hawkish than Tarullo and Kocherlakota. The dollar’s performance will depend on whether these 3 Fed Presidents also believe that tapering this year is still an option.

Meanwhile up North the Canadian dollar extended its losses against the greenback on the heels of softer consumer prices. Inflationary pressures stagnated in the month of August with year over year gains slowing to 1.1% from 1.3%. Core prices may be slightly hotter but price pressures are at a minimum right now, which will allow the Bank of Canada to keep monetary policy easy.

Kathy Lien
Managing Director

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