THE TAKEAWAY: USD FOMC January meeting Minutes > Size of QE May Need to Vary as Economy Improves > USDOLLAR BULLISH

The Federal Reserve’s policymaking board has been a difficult flock to read; the December meeting Minutes showed that FOMC voters were concerned about the scope of QE3, even though it was increased at the very same meeting. This paradoxical policy up until this point has been viewed as bullish for the US economy. After all, the Fed wouldn’t threaten draining liquidity from the market unless conditions were improving. Today, the Fed’s stance became a bit clearer.

The January meeting Minutes laid out the most hawkish set of Minutes to date, with “a number of participants stated that an ongoing evaluation of the efficacy, costs and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.” Essentially, the Fed is worried about excessive risk taking in financial markets – that excess liquidity has started to create the threat of systemic risk if the Fed doesn’t wind down its stimulus efforts sooner than later.

The Minutes also said that “[A] number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee’s exit principles, either as a supplement to, or a replacement for, asset purchases.”

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) 5-minute Chart: February 20, 2013
Charts Created using Marketscope – Prepared by Christopher Vecchio

In sum, these are hawkish chirps from the Fed, which have proved bullish for the US Dollar. The world’s reserve currency has surged across the board, most notably against the British Pound and the Euro. The GBPUSD has fallen towards 1.5200 on the news, while the EURUSD traded below 1.3300. The other components of the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR), the Australian Dollar and the Japanese Yen, followed suit: the AUDUSD slipped towards 1.0250; and the USDJPY continued its climb towards 94.00.

The aggregate effect of these moves has pushed the USDOLLAR to fresh 2013 highs, testing above 10400 for the first time since September 2010.

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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