The U.S. dollar gained on Tuesday after Federal Reserve Vice Chair Richard Clarida backed further interest rate hikes but noted the importance of monitoring economic data as the U.S. central bank approached a neutral stance.
In a carefully worded speech that comes on the heels of another volatile stock market drop, Clarida stressed how difficult it was for the U.S. central bank to determine both the neutral interest rate and the maximum level of unemployment.
“The Powell speech on the overshoot of neutral was construed as a very hawkish delivery,” said Mark McCormick, North American head of FX strategy at TD Securities in Toronto. “The Fed has been gently walking that back since.”
Clarida’s comments are “reconfirming that the overshooting of the neutral is not a specific goal, but it’s something that they will probably do if the data allows them to do it,” McCormick said.
Slowing global growth and volatile stock markets have raised expectations the Fed may halt its tightening cycle sooner than previously expected.
A speech by Powell on Wednesday and minutes from the Fed’s Nov. 7-8 meeting on Thursday will be evaluated for further indications of how many more times the U.S. central bank is likely to hike interest rates.
The dollar index climbed earlier on Tuesday after U.S. President Donald Trump said he expects to raise tariffs on $200 billion in Chinese imports to 25 percent from 10 percent currently.
Trump and Chinese President Xi Jinping are due to meet at a G20 meeting in Buenos Aires on Nov. 30 to discuss contentious trade matters.
“If there’s no breakthrough, that makes it more likely that more tariffs will be imposed and that increases downside risks to trade,” said Lee Hardman, a currency analyst at MUFG in London.
Outperformance by emerging markets and other high beta currencies on Tuesday, however, suggested that much of the pessimism around the lack of a trade deal may already be priced into the market.
“They don’t have do anything, and if they don’t do anything there’s a lot of bad news priced in,” said McCormick.
Sterling was weaker after Trump said the agreement allowing Britain to leave the European Union may make trade between Washington and London more difficult.