"Part of what's driving that is the market was bracing for the meeting minutes to be a bit more hawkish than they are".
The dollar inched higher versus a basket of currencies on Wednesday, with investors awaiting minutes of the Federal Reserve's last policy meeting for hints on the pace of further United States monetary tightening.
The sell-off was tempered, however, after the Fed released its meeting minutes, indicating interest rates would not be raised at a faster-than-expected pace.
Separately, Fed policy makers backed potentially making a "small technical adjustment" of setting the interest on excess reserves, or IOER, rate "modestly below" the top of the federal funds target range to help keep the effective fed funds rate "well within" range.
"It was noted that it was premature to conclude that inflation would remain at levels around 2%, especially after several years in which inflation had persistently run below the Fed's 2% objective", the minutes said. Other measures of inflation, such as the Fed's preferred personal consumption expenditures index, are also sat at 2%.
Investors had already widely expected officials to raise rates when the FOMC meets June 12-13, according to interest-rate futures prices.
The Federal Reserve Bank says that its sees a rate hike in June.
"In response, market pricing for interest rate hikes was little changed, with 92 percent chance of a 25 basis point rate hike next month".
Above: US Dollar index in 2018. The dollar index has pulled back since hitting a five-month high of 94.058 on Monday.
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Above: 10 Year US Government Bond Yield.
Meanwhile, Asian shares were slightly lower as investors were cautious after US President Donald Trump said he was not pleased with recent trade talks between the US and China, tempering optimism over progress made so far in trade talks between the world's two largest economies.
"We think the Dollars could easily be vulnerable to a dovish tone - such as greater comfort with an inflation overshoot narrative - or perhaps evidence of a robust discussion about yield curve flatness". Notably, as much as yields have risen during the last month or more, the difference between short, medium and longer term borrowing costs in the U.S. is strikingly low.
"Given the mature stage of the economic cycle and wider deficits forecast for the foreseeable future, we are sympathetic to this view". But we do not see immediate risks on the horizon. "In the past, it typically isn't until when policy becomes too tight that the yield curve inverts", Issa adds.
"We think gold will be in for a period of consolidation in the short term and are monitoring moves in ETF holdings - which have surprisingly held rather steadily given the move through $1,300 support", said MKS senior precious metals dealer Alex Thorndike.
"They didn't take [a fourth hike] off the table", he said.
The FOMC's minutes revealed that a rate hike is likely at the next meeting and allowing a modest "overshoot" on inflation may be good.
Issa and the TD Securities team have recommended that clients of the bank bet on a fall in the USD/JPY rate over the coming weeks, entering trades around Thursday's 109.50 level and targetting a move down to 105.0.