FOREX-U.S. dollar holds gains after Fed minutes

Wed Jan 8, 2014 3:04pm EST

Related Topics

* Fed wants gradual reduction of stimulus

* Fed upgrades U.S. outlook

* U.S. dollar helped by strong private sector jobs data

By Curtis Skinner

NEW YORK, Jan 8 (Reuters) - The dollar held gains against the euro and yen on Wednesday following minutes from the Federal Reserve's December meeting, which showed the U.S. central bank was on track to wind down its bond purchases at a steady pace.

The Fed minutes laid out the central bank's rationale for cutting purchases of Treasuries and mortgage-backed securities to $75 billion a month from $85 billion starting this month.

Those purchases have helped lower interest rates. As the economic outlook has improved, the expectation is for reduced stimulus. Better hopes for U.S. growth have driven investors to the dollar, which reached a six-week high against a basket of six major currencies.

The dollar index was last up 0.4 percent on the day at 81.145.

"On balance, the fact that the minutes do not meaningfully alter the outlook for a gradual and steady reduction in Fed stimulus remains positive for the dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"Indeed, as the tone of economic data improves, there is a risk that the Fed could become more aggressive in its reduction of monetary stimulus."

Many members of the policy-setting Federal Open Market Committee wanted to proceed with caution in trimming the asset purchases, and most wanted to stress that further reductions were not on a preset course.

According to CME FedWatch, the contracts show rates markets now assign roughly a 60 percent probability for the first Fed rate hike occurring as early as the April 2015 meeting of the Federal Open Market Committee.

Three weeks ago, when the Fed announced plans to scale back its massive bond-buying stimulus but pledged to keep interest rates low for the foreseeable future, rate futures signalled expectations for the Fed to hold off on its first rate hike until July 2015 at the earliest.

Still, the market showed minimal reaction as traders had already priced in the Fed's reduction in stimulus.

The dollar last traded 0.3 percent higher at 104.85 yen , below an earlier high of 105.12 yen but above Monday's two-week low of 103.88. Last week, the dollar reached a five-year peak of 105.44 yen.

The euro, meanwhile, was down 0.3 percent versus the dollar at $1.3568. Against the pound, the euro hit a one-year low, with the euro buying 0.8252 pound late on Wednesday.

"Overall, I think this was in line with the markets expectation," said Brian Dangerfield, currency strategist at RBS Securities in Stamford, Connecticut.

"The dollar reaction has been fairly muted to this, and I think that's because for the most part, the information that we've received is not significantly different from what the chairman has been saying over the past few weeks."

Earlier in the session, a report by a payrolls processor showed U.S. private employers added 238,000 jobs in December, more than expected and the best reading in 13 months. ADP's National Employment Report also revised November's job gains higher.

The ADP report comes two days ahead of the government's non-farm payroll report, a measure of the labor market that is more comprehensive and includes both public and private sector employment.

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