The U.S. dollar took a hit yesterday during the North American session. It traded with a bid tone the entire London session, only to sell aggressively once the New York session opened for business. As such, the EURUSD pair jumped from 1.2130 to over 1.22, the AUDUSD from 0.7690 to 0.7770, and so on.
Two factors contributed to the U.S. dollar’s slide. One was the stability in the stock market that keeps trading close to all-time highs. Another was Fed member Brainard remarks that reminded everyone of the Fed’s Average Inflation targeting (AIT) and the exponential rise in the U.S. M2 money supply in response to the coronavirus crisis.
Fed Members and their Speeches
Every six weeks, on a Wednesday during the second part of the U.S. trading session, the Fed releases its famous Federal Open Market Committee (FOMC Statement). It often follows with a press conference where the Fed’s Chair highlights the statement’s info and takes questions from the audience. As such, the U.S. dollar’s volatility reaches extreme levels.
Between FOMC meetings, the Fed has different ways to guide the market. One is the FOMC Minutes, released three weeks after the FOMC meeting, showing how the discussions went at the previous meeting, what the topics were, if there was unanimity in decisions, who dissented, how many doves and how many hawks are in the committee, and so on.
Voting Fed members are also scheduled to speak between two meetings. This is important for two reasons – there are many Fed members, and every week, there is at least one speech or intervention by one Fed member. For instance, Brainard is a voting member, and therefore the market takes her words accordingly. Also, later today, she will speak again, as well as Fed member’s Clarida – another voting member.
The market participants were reminded yesterday that the Fed shifted its mandate to AIT and will allow inflation to shoot above 2%. The U.S. M2 money supply, currently running at +25% on a 12-month rate of change basis, exceeds the long-term growth rate by more than three times – leading to higher inflation expectations in the future.
As such, the market’s reaction is fully understandable as the dollar took a hit across the board. It is not the first time when a Fed member, other than the Fed’s Chair, moves the markets – and will not be the last time either.