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Dollar extends yen gains in Asia as Fed, BoJ diverge

22 September 2017

At the same time, the typically temporary nature of disaster-related economic slowdowns means the markets needn't fret that the economy and the rate outlook have drifted off course; they are merely delayed, not derailed.

Finally, futures markets are forecasting a higher probability that the Fed will hike the short-term federal funds rate in December.

So, it is quite rational on the part of the Fed to signal one more rate hike this year and three rate hikes next year.

The rand weakened to a five-week low against the dollar on Tuesday before the central bank's interest rate decision this week and the US Federal Reserve's policy meeting. The Fed's future actions on interest rates will go a long way toward how much Americans pay to borrow - whether it's for a mortgage, a vehicle or next month's credit card bill.

US stocks pulled back from their all-time highs, though bank stocks cheered the prospect of higher interest rates which should help their profits.

Its cautious confidence reflected steady economic growth in the face of bouts of overseas weakness, and a US unemployment rate whose drop has been almost uninterrupted over the last seven years to 4.4 percent last month. Over time, the shrinking of the Fed's bond portfolio could push mortgage rates (and other long-term interest rates) upward, because higher rates would be necessary to attract investor money.

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The dollar's gains come after a run of losses in recent months as tepid inflation and a lack of movement on US President Donald Trump's economic agenda in Congress had seen investors bet on no more rate hikes this year. But even though the Fed upgraded its economic growth projection, it downgraded its inflation forecast.

The average rate for one year certificates of deposits has risen from.27% in December 2015 to about.4% today, according to data from Bankrate.

Clearly, if the "dots" do move lower, it will negatively impact on the Dollar, which is highly correlated to Fed Fund rate expectations.

Amid all this, the Fed quietly confirmed that it would begin reducing the size of its bloated balance sheet, ever so slowly (just $10-billion a month, initially), starting in October.

A sequence of unexpected natural disasters, inconsequential inflation and deep-rooted personnel changes at the Fed itself are the main factors favouring a more cautious assessment. The resolution of the stand-off over the United States debt ceiling in Congress has removed the final obstacle to the decision, which the Fed said would proceed at a fixed monthly level that can be adjusted as needed to be either faster or slower.

The other reason the Fed may not raise its fed funds rate this week: Hurricanes Harvey and Irma are expected to ding the US economy in the short-term.

Dollar extends yen gains in Asia as Fed, BoJ diverge