Patient Fed No Match For Strong Dollar ; SNB Goes

The US dollar is on the rise one day after the Federal Reserve struck a more cautious tone with respect to 2015 interest rate increases. At the final policy meeting of the year, Chairman Janet Yellen and her colleagues took a delicate step toward raising rates, confirming the central bank was on course, though not right away.

Ahead of the statement, Fed watchers were on the lookout for any change to the current policy of keeping rates low for a “considerable time.” The central bank did replace that phrase with a new key word, as the Fed will become “patient” in beginning to normalize rates. The market’s reaction was erratic as the US dollar was initially sold off before rallying into the end of the day as Chairman Yellen acknowledged rates could begin moving after a “couple” of meetings next year.

Looking outside the US for a moment, we turn to Switzerland where the Swiss Franc weakened the most in nine months against the euro after the Swiss National Bank introduced negative interest rates to help defend the currency’s cap. The SNB’s action just highlights the policy divergence across the world and adds speculation that the European Central Bank will be stepping up asset purchases next year. The SNB added that it was prepared to buy unlimited foreign currency to shield the 1.20 EUR/CHF cap and was prepared to take further measures if needed. When the ECB meets in early 2015, this move by the SNB may play a factor into their planning.

Economic data was limited overnight but it is interesting to note that Chinese home prices posted the third consecutive annual drop in November, adding more concerns about Chinese growth. In Europe, it was the Swiss National Bank that paced markets but some more positive(ish) data came out of Germany in the form of the most recent IFO Business Climate Indices. Although all three surprised higher than anticipated, the euro continued its slide in the face of an ever stronger greenback. UK retail sales for the month of November also beat expectations but gains in sterling were limited to EUR/GBP selling, putting trend line support at .7855 to test.

Jobless claims in the US decreased to the lowest levels in six weeks this morning, as the number of Americans filing for unemployment benefits fell 6,000 to 289,000 for the week ended Dec. 13. The world’s strongest economy will look for more positive data this morning when the Markit Services and Composite PMIs are released before the Philly Fed Manufacturing Index. Markets will be looking for numbers above 50 for both PMIs, showing economic growth. The most recent bout of dollar strength should continue as economic data continues to outshine the European and Asian counterparts. Real worries over growth in China and European pillars Germany and France should continue to boost the dollar into year end.

Further reading:

Cheap oil good for consuming countries, but won’t help EUR or JPY

Philly Fed Manufacturing Index slides to 24.5 points