Worries over the US trade deficit weigh on currency

The dollar trimmed gains yesterday after minutes from the Federal Open Market Committee meeting (FOMC), while suggesting that US interest rate hikes would continue, expressed concern about the US trade deficit.

The FOMC minutes for its February 1st-2nd meeting said that the US trade shortfall, which has weighed on the dollar for the last three years, is likely to stay wide, noting there are few signs that a weaker dollar trend is having an impact on the overall current account picture. The Fed also repeated that its policy of pushing interest rates higher would keep inflation in check.

"I don't think they've added anything particularly fresh on interest rates. However, the minutes do seem bearish on the prospects for the US current account," said Mr Richard Franulovich, senior currency strategist at Westpac Banking in New York.

In Europe, the euro closed at 1.3205 against the dollar, compared to 1.3221 on Tuesday's close. Mid-afternoon in New York, the euro recovered some losses against the dollar to $1.3231, down 0.1 per cent from late levels on Tuesday but up from earlier session lows around $1.3186.

The US currency reacted little to comments by Atlanta Federal Reserve Bank president Mr Jack Guynn, who said the Fed has some distance to go in raising interest rates from ultra-low levels and the benchmark federal funds rate remains stimulative after six rises.

The dollar earlier garnered modest support after US inflation data left expectations for Federal Reserve interest rate hikes intact and European Central Bank policy-makers signalled little chance of a euro-zone rate increase for several months.

The widening differential of US over euro-zone official interest rates is supporting the dollar because this increases the relative attraction of short-dated, dollar-denominated deposits to foreign investors.

January's rise in the US consumer price index broadly met expectations. While appearing to reduce the chance of more-aggressive US interest rate hikes, that report seemed to confirm the market's anticipation of gradual rate increases.