Talking Points:

US Dollar Under Fire as Fed Officials Downplay Interest Rate Hike Outlook
Aussie and NZ Dollars, S&P 500 Futures Send Mixed Signals on Risk Trends
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The US Dollar underperformed in overnight trade, falling as much as 0.4 percent on average against its leading counterparts. The selloff followed over-the-weekend comments from a roundup of Fed officials that poured cold water on expectations of a swift transition to interest rate hikes after QE3 asset purchases are wound down this month.

Fed Governor Daniel Tarullo said the central sees downside risks for global growth, which policymakers will have to consider when setting monetary policy. Chicago Fed President Charles Evans – a perennial dove – said inflation is trending below the Fed’s 2 percent target at around 1.5 percent and cited the stronger US Dollar as a “headwind”. Vice Chair Stanley Fischer proved most blunt, saying: “If foreign growth is weaker than anticipated, the consequences for the US economy could lead the Fed to remove accommodation more slowly than otherwise.”

The Australian and New Zealand Dollars outperformed, adding as much as 0.7 and 0.8 percent respectively against their US counterpart. Looking ahead, a quiet economic calendar in European trading hours is likely to see sentiment trends remain at forefront. With that in mind, performance in the G10 FX space may be offering a clue on what lays ahead for the markets at large, pointing to a recovery in risk appetite linked to the prospects for longer-lasting Fed support.

With that in mind, S&P 500 futures are pointing decidedly lower in late Asian trade. This may reflect catch-up selling by regional traders following on from Friday’s blood-letting on Wall Street. In this case, FX may be front-running other asset classes where the Fed-driven optimism has yet to filter through. On the other hand, Aussie and Kiwi gains may prove short-lived if leading cues from index futures prove accurate and the “risk-on” mood unravels.

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