28 October 2016
The US Federal Reserve is unlikely to announce a rate hike at its meeting this week. Photo: Bloomberg
The US Federal Reserve is unlikely to announce a rate hike at its meeting this week. Photo: Bloomberg

US dollar loses strength as Fed remains cautious about rate hike

The US dollar edged up in early trading Tuesday.

The US Federal Reserve is unlikely to announce a rate hike at its meeting this week, but it may underline that, as long as inflation and the job market improve further, future rate increases are still on its agenda.

It’s widely expected that the Fed might raise interest rate two to three times this year, rather than four times as expected in December.

The US Fed funds rate shows there is a 50 percent chance of a rate hike by June, and 100 percent by December.

In the meantime, the oil price rally has seemingly run out of steam, as the market is concerned its six-week recovery may fail to be sustained given gloomy fundamentals.

US crude oil inventories keep rising, while Iran has yet to agree to freeze its oil output.

The euro eased from a three-week high as European Central Bank president Mario Draghi said the ECB has no plans to further cut interest rates.

Gold extended its fall to a second day and touched a two-week low of US$1,225.7 per ounce on Tuesday.

The global stock market uptick in the last few days has put pressure on gold, since the yellow metal has already soared 16 percent so far this year.

The Fed’s rate hikes in the future will increase the opportunity costs of holding gold.

The world’s largest gold ETF, SPDR Gold Trust, said its gold holdings declined 1.08 percent to 790.14 tonnes on Monday from last Friday.

Meanwhile, the COMEX long positions in gold held by hedge funds and fund managers soared to a 13-month high on March 8, extending a rally for the eighth straight week.

Nevertheless, the gold price is likely to weaken further, with support at around US$1,207 in the short term. The yellow metal faces huge resistance at around US$1,272.

The Bank of Japan maintained monetary policy unchanged Tuesday, and issued a more cautious view on the prospects for economic growth.

The central bank also issued a warning about inflation, indicating it will launch further stimulus measures in future.

It has also decided to grant an exemption from negative rates for “money reserve funds” (MRFs), as a negative interest rate would prevent Japan’s immense savings from moving out of deposits and government bonds and into more productive investments.

Recent data shows Japan’s economic recovery remains fragile. The appreciation of the yen has mitigated pressures from import costs.

But a stronger yen may hamper the BoJ’s efforts to achieve its inflation target of 2 percent and may prompt the central bank to change its policy stance soon.

The BoJ has treated the range of 110-111 yen against the US dollar as its bottom line.

The yen touched the range twice last month, and some officials have openly voiced concern about the strength of the currency.

Investors could consider selling yen in this range.

The US dollar has gradually given up its gains as the Fed adopts a slow and cautious approach to hiking interest rates.

The US dollar may weaken further if rate hikes are not introduced as the market expects.

This article appeared in the Hong Kong Economic Journal on March 16.

Translation by Julie Zhu

[Chinese version 中文版]

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Sales director, Emperor Capital Group Limited; HKEJ columnist

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