The US dollar is enjoying a mid-week bounce against all the major currencies. It appears that participants in Asia and Europe are giving more credence to NY Fed Dudley’s comments yesterday. Although many in the market have given up on a rate hike this year, Dudley reaffirmed his belief that the economy was accelerating in H2 and that the market was being too complacent.  Â
Many participants appear confused over the talk of the structural shifts in the economy and the lower “natural” rate or long-term equilibrium Fed funds rate is lower that officials previously thought (and dot plots reflect this gradual adjustment to the Fed’s thinking) on one hand, and the cyclical policy adjustment on the other. To put it simply, just because the terminal rate on Fed funds is considerably lower than past cycles does not mean that the there is no scope to hike rates. Â
In addition to Dudley’s comments, there was news that US housing starts rose in July instead of falling as many had expected. It was the first back-to-back increase since March-April 2015. It was sufficient to prompt the Atlanta Fed to revise up its GDPNow tracker to 3.6%  due to the increase in residential investment. Separately, industrial output and manufacturing were also stronger than expected. Â
The focus on the Fed continues with the minutes from the FOMC July meeting set to be published later today. Tomorrow Dudley holds a press conference in NY, and there will be a Q&A session. Still, his comments yesterday likely stole much of not only his thunder, but perhaps Yellen’s too when she appears at the Jackson Hole confab later this month. Â
The dollar frayed the JPY100 support level, falling to almost JPY99.50 before bouncing back. Our technical work suggests a convincing break of JPY100 is needed to signal a new leg down that could carry the greenback toward JPY92.50. The dollar reached JPY101.20 in Asia before consolidating in the European morning. A move above yesterday’s high (~JPY101.30) is needed to begin repairing the technical damage.  Â
