The dollar leaped higher against the euro and yen on Tuesday as minutes from the Federal Reserve's March policy meeting weakened expectations of more stimulus measures from the US central bank. Fed policymakers appeared less keen to launch a new phase of monetary stimulus through a third round of bond buying, or quantitative easing (QE). In the half hour following the release, the euro tumbled a full cent, its biggest drop since March 9.
The Fed's two rounds of QE were tantamount to printing money, so diminished expectations of QE3 lifted the appeal of the dollar. The minutes surprised the market because just last week Fed Chairman Ben Bernanke kept alive the idea of more stimulus by warning about the risks of long-term unemployment for the economy, which investors construed as meaning that additional stimulus was still on the table.
"What the minutes have done was essentially take the market off guard because the members have indicated that there is no need for additional stimulus, unless the economy lost momentum or inflation was slower to pick up," said Alexander Chepurko, foreign exchange analyst at Forex Club in New York. Against the yen, the dollar last traded at 82.82, up 0.9 percent on the day, its strongest performance since March 9, with a session peak of 82.99 and a trough of 81.54.
The euro was last trading down 0.7 percent at $1.3228, with the session low at $1.3212 and peak at $1.3367. Since the euro's mid- to late-March rally from $1.3000 to just below $1.34 fizzled out, the currency has stayed in a relatively tight $1.3200-$1.3400 range. Many analysts expect it to move lower if it breaks below that area, while a break above $1.34 would be a bullish signal. ECB policymakers meet on Wednesday, with analysts saying a hawkish message from the bank on the need to get back to concentrating on quelling inflation instead of helping Europe's economy and financial system out of crisis may give the euro a brief boost. Investors are still looking to sell the euro as concerns grow about a fragile outlook for the eurozone economy and high debt levels in Spain. Italian and Spanish debt yields rose on Tuesday amid concerns about the eurozone's ability to keep budget deficits under control.
Strong correlations between Treasury yields and the dollar/yen currency pair suggest that US interest rates and Fed monetary policy will decide whether the dollar extends its move higher. US Treasury debt yields, which move inversely to price, rose sharply after the Fed minutes.
"Last month we argued that the dollar/yen pair had set a long-term bottom on a simultaneous surge in US Treasury yields. It is too early to tell whether we were correct in our forecasts, but sharp USDJPY gains suggest fresh lows are unlikely," said David Rodriquez, a quantitative strategist at DailyFx in New York. In the options market, one-month dollar/yen composite risk reversal rose to -0.44 vol versus Monday's -0.42 vol, with a bias toward yen puts. Sentiment on the yen has turned more bearish for over a month. Meanwhile, the Australian dollar fell to its lowest level against the dollar since mid-January at US $1.0297, weighed by the Reserve Bank of Australia.