The dollar rose to its highest in more than 11 months against a basket of currencies on Friday after Federal Reserve Chair Janet Yellen came out more balanced than expected on her views about the US economy and monetary policy in remarks to central bankers. The speech by Yellen, a policy 'dove', to an annual gathering of central bankers in Jackson Hole, Wyoming, cited persistent labour market slack but noted faster recovery in the sector could accelerate the timing of a Fed interest rate hike.
The greenback climbed to an 11-month high against the euro and a more than four-month peak above 104 yen following Yellen's speech. Yellen acknowledged slack in the US jobs market as she called for a "pragmatic" approach to monetary policy to allow officials room to evaluate data without committing to a pre-determined rate path.
But at the same time, she said that if the labour market recovered more quickly than anticipated, the Fed may have to raise rates sooner and faster than expected. "If progress in the labour market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter," Yellen said. Higher interest rates tend to boost the allure of the dollar as they raise the yield on some US assets.
"It was very evident that the Fed's dovish tone is starting to wane," said Christopher Vecchio, currency analyst at FXCM-owned DailyFX.com. "The vague yet important notation made by Yellen was that interest rate hikes could be coming sooner than market participants currently expect, especially if the labour market begins to progress faster. Overall, this provoked an updraft in the dollar."
The dollar index rose to 82.456, its highest since September 2013. It was last up 0.2 percent at 82.315. The greenback advanced as high as 104.18 yen, its highest since early April, and was last up 0.1 percent at 103.90. The euro, meanwhile, stayed weak against the dollar after European Central Bank President Mario Draghi told the Jackson Hole gathering that the bank is ready to adjust monetary policy further to alleviate a sluggish euro zone economy.
The euro zone common currency, which had plunged earlier in the session to $1.3221 against the dollar, its lowest in 11 months, last traded at $1.3246, down 0.3 percent. For Joe Manimbo, senior market analyst at Western Union Business Solutions, Yellen seemed less concerned about low wage growth. "Low wages are seen as an obstacle to an early Fed rate hike so any less concern on that front would be supportive of the rate debate," Manimbo said.
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