Dollar gains for a second day as markets eye Fed minutes

The dollar edged higher on Wednesday as a rally on Wall Street boosted risk appetite, although gains were capped before the release of Fed minutes later in the day.

Still, moves were muted in currency markets, contrary to the big gains in global stocks and drops in government bond yields in markets such as Italy.

“The dollar has been strongly correlated to risk appetite for much of this year, but in the last few days we have seen this correlation loosening a bit, suggesting markets need more strong economic data to push the dollar higher,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.

Against a basket of its rivals, the dollar rose 0.1 per cent to 95.15. It remains about 2 per cent below a 2018 peak of near 97 hit in mid-August.

Major Wall Street indexes rose by more than 2 per cent each as strong earnings indicated the U.S. economy is still expanding, despite rising interest rates and global trade-war tensions.

But market analysts warned against buying into the dollar’s strength as global financial conditions appeared to be tightening globally.

Cross-currency basis swaps in euros, yen and sterling, money market gauges of offshore dollar liquidity, have widened in recent weeks.

That suggest the U.S. Federal Reserve’s rate hikes have cut into the availability of overseas dollars.

“Risk caution is warranted … the replacement of Fed liquidity has come at the expense of tightening liquidity conditions outside the U.S.,” Morgan Stanley strategists said.

Markets will be looking for clues on the dollar’s direction and the path for U.S. interest rates from minutes of the Fed’s September meeting, due for release later on Wednesday.

Interest rate futures are pricing in a 77 per cent likelihood that the Fed will raise rates in December, according to the CME Group’s FedWatch Tool.

Two more increases are likely next year.

The British pound was down 0.2 per cent at $1.3158 after gaining 0.25 per cent on Tuesday as a crucial European Union summit got underway.

On Wednesday, the euro traded lower at $1.15575, down 0.2 per cent.

On Tuesday, it reached $1.1622 – its highest since Oct. 1 – before giving up its gains.