Neil DennisJust as the dollar was enjoying a late summer rally, signs of increasing dovishness from the Federal Reserve have put the greenback's recovery on hold.
What chance for a reversal of the dollar's fortunes – still down more than 9% this year – when growing disunity in President Trump's cabinet reflects the divisions across the nation?
Trump's election pledges to make America great again belie an economic plan that is being eroded at an increasing pace by corrosive relationships within the White House and between the President and industry.
Divided Fed
Minutes from the Fed's 25-26 July policy meeting, published on Wednesday evening, revealed divisions over when to announce the start of stimulus withdrawal – the gradual contraction of the Fed's $4.5tn balance sheet.
Several participants at the meeting were prepared to announce a starting date for stimulus withdrawal at the July meeting, the minutes said.
Fed chair Janet Yellen: the Fed is split on rates and when to announce its withdrawal of stimulus - Source: Federal ReserveMost policymakers, however, were in favour of deferring the decision to "accumulate additional information on the economic outlook and developments potentially affecting financial markets".
Some analysts believe this "deferral" simply means putting the decision off until the September meeting.
"Given the strong payrolls and retail sales numbers since the meeting, we expect the FOMC to announce the start date at the September meeting," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Interest rate hikes
There was also division over the pace of future increases in interest rates.
Concerns over stubbornly low inflation clashed with expectations that tight labour market conditions could lead to higher wages and a rapid inflationary spike that leaves the Fed behind the curve.
"This is arguably the most divided FOMC that we’ve seen since the central bank began normalising policy, with the number one debate being whether the current weakness of US inflation is transitory or transitional," says Chris Turner, head of foreign exchange strategy at ING.
The Fed had tentatively scheduled four quarter-point interest rate increases this year. Having raised in March and June, two more were expected, likely in September and December to bring the main Fed funds rate to 1.5-1.75% by the end of the year.
While the hard growth data such as GDP, retail sales and employment have remained robust, forward looking measures such as purchasing manager indexes and inflation expectations are starting to cool.
"Unless we start seeing prices heading north, the Fed is unlikely to raise rates again this year, and the dollar will remain under pressure," says Hussein Sayed, chief market strategist at FXTM.
White House woes
But the increasingly dovish Fed isn't the only pull on the dollar going forward, as uncertainties over the political future persist.
Behind the peaceful and calm facade of the White House tensions between staff are bubbling - Source: Wikimedia CommonsWhile Trump is likely to weather whatever investigations into his Russian dealings throw at him, the increasing divisions between staff in the White House are causing the Presidency untold reputational damage.
The fall-out following Trump's refusal to condemn fascists and neo-Nazis in Charlottesville is responsible for the wholesale desertion and disbanding of his business council.
And in a bizarre move on Wednesday, chief strategist Steve Bannon gave an uncompromising and unsolicited interview to The American Prospect saying the US and China were engaged in an economic war.
"Not only is this a concern for the US markets but fears that Trump is expending more energy in fighting scandals rather than concentrating on policy have also been fuelled," says Jane Foley at Rabobank.
Indeed, the realities of daily political life in Washington seem to have knocked some of the enthusiasm out of Trump's pursuit of reforms.
Foley adds: "There is now even less reason to hope that the Trump Administration will be able to offer significant fiscal reform."
Market reaction
The dollar has been enjoying a rally during August, as traders profit from a summer unwind for gains in the euro, yen and others, but has lost 0.5% over the past two sessions, with the Fed minutes on Wednesday keeping the currency under pressure.
However, many now believe the Fed's influence over the dollar is decreasing.
"The Fed is just one of three factors weighing on the dollar," says Turner at ING. The other two, he says, are signs of a top in the US economic cycle and political risk.
He adds: "Both are how we rationalise the decoupling between dollar-crosses and short-term interest rate differentials – and why the Fed may just be a subplot for the dollar right now."