Dollar declines despite suggestion of small taper

The dollar has lost ground against several major currencies today, despite a voting member of the FOMC suggesting that tapering could be introduced by the Fed in response to improvements in the labour market.

James Bullard, the President of the St Louis Fed and a voting member of the FOMC this year, delivered a speech today in which he said that a smaller reduction in stimulus could be the right move for the Fed, although he gave no specific timeframe

‘A small taper might recognize labor market improvement while still providing the [Federal Open Reserve] committee the opportunity to carefully monitor inflation during the first half of 2014,’ he said. ‘Should inflation not return toward target, the committee could pause tapering at subsequent meetings.’

Stimulus is normally seen as a process that leads to a currency being debased, so that a taper would normally be considered dollar positive. Mr Bullard’s comments, though, raise the prospect of extended stimulus should inflation remain cool. Inflation has persistently lingered below the Fed’s 2% target rate in 2013, with the recent PCE index indicating that prices increase by just 0.7% year-on-year in October.

The dollar index, a gauge of the dollar’s strength against a basket of six major currencies, declined 0.2%, while sterling and the euro made respective gains of 0.23% and 0.46% by mid-afternoon in New York.

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