US$ Lower Across the Board on Dovish Fed and Low Inflation

USD

The U.S. dollar fell harshly overnight as better-than-expected data released abroad and dovish comments from U.S. policy makers led to a perfect storm of dollar weakness.  Late yesterday, San Francisco Fed President John Williams argued that the central bank should rethink its 2.0% inflation target.  The dovish take from the non-voting member adds to a slew of more cautious takes on monetary policy from voting members.  As such, traders are reducing bets that the Federal Reserve will boost rates again in 2016.  Tempus maintains our long held belief that no such rate hike will happen this year.

This morning’s economic data will do little to help the greenback recoup its losses.  Housing starts climbed to a 5-month high in July (2.1% v. -0.8%), but U.S. inflation data continues to drag.  U.S. consumer prices were little changed in July, a sign subdued inflationary pressures will give Fed reason to keep rates low. It was the first time in five months the consumer price index failed to advance and followed a 0.2% gain in June, according to the Labor Department.  Excluding volatile food and energy prices rose 0.1%, which was also lower than expectations.

Later this morning, industrial production is expected to have risen 0.3% in July, after gaining 0.6% in the month prior.

GBP

The British pound is showing signs of life, pushing off a 31-year low against the U.S. dollar and a three-year low versus the Euro.  A report showed that U.K. inflation accelerated in July, more than economists had forecast.  The 0.6% jump beat expectations of a 0.5% rise and is still well below the Bank of England’s 2.0% target.  However, rising inflation may limit the scope of future policy easing by the Bank of England.  Climbing inflation and U.S. dollar woes have allowed the GBP/USD to climb 0.8%.

JPY

The Japanese yen, one of the best performers against the U.S. dollar this year, pushed higher against versus its American counterpart.  The yen reached its strongest level versus the U.S. dollar since the immediate aftermath of the Brexit vote, which sent the safe-haven currency soaring.  If the yen closes today at its current level, it will be the currency’s strongest close since 2013.  The yen is 20.0% stronger on the year versus the U.S. dollar this year.

As prospects of a Federal Reserve rate increase wane, the Japanese yen has gained as the differential between the U.S. Fed and the Bank of Japan’s policy has failed to widen.  However, the yen’s move is not a welcome sign for Japanese officials or businesses.  The yen’s strength makes its exports less competitive, adding another hindrance to an already shaky economic recovery.