The FOMC discussed the reasons for the weak start of the US economy into the New Year in detail. In the end the reasons given went back to the by now well-known transitory factors (bad weather, port strike). Some FOMC members warned that the appreciation of the US dollar as well as the negative effects of the low oil price on company investments might have had a more sustainable effect than previously assumed. But the majority was in agreement that overall the risks for the economy were balanced. So, yes, the strong dollar was discussed but there were no major concerns that it might be a decisive factor for slowing the economy as yet. So for the time being there is nothing to suggest that the dollar might not recover further. Of course what remains decisive is that the rekindled faith in the strength of the US economy is confirmed by the data. Today will bring only second tier data in the shape of the Philadelphia Fed Index and in particular initial jobless claims and existing home sales. However, the data on housing starts on Tuesday illustrated very clearly that the data only has to surprise sufficiently to create a strong market reaction. Even the first advocates of EUR-USD parity seem to be re-emerging again. “A return to the USD appreciation path would not be expected to see in mid-2014/early 2015 any time soon. Even if the FOMC is not yet stressing the strong USD much that does not mean it would not get nervous if the appreciation gathered momentum again. At least there is a reference (or the hope?) in the minutes that if the USD were not to appreciate any further its negative effect would recede”, says Commerzbank.
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