The dollar retreated after Federal Reserve chairwoman Janet Yellen set a decidedly cautious tone about the health of the US economy, in contrast to the more hawkish views of colleagues.
Speaking at the Economic Club of New York yesterday, Ms Yellen repeatedly expressed concern about global economic risks and warned the outlook for inflation was “somewhat more uncertain”.
Her closely watched speech drove the index that measures the dollar against its main peers 0.5 per cent lower, while it also fell significantly against several emerging market currencies.
Ms Yellen’s speech is one of the two key events of the week investors are eyeing for clues about the dollar’s direction, the other being Friday’s non-farm payroll data for March.
Since the Fed’s dovish March meeting, which surprised the market and pushed the dollar lower, more hawkish speeches and comments from Fed members has added to the market’s confused reading.
According to Brad Bechtel, managing director at Jefferies International, there has been a subtle shift in Fed policy from a reliance on data-dependence to including into their calculations external factors.
“Not many will take them at their word for now from speech to speech and press conference to press conference given how many subtle reversals we’ve been getting,” said Mr Bechtel.
One reading from some FX commentators is the Fed was spooked by the market’s downbeat reading of the March meeting and has sought to redress it.
Another is that the Fed, the Bank of Japan and the European Central Bank are anxious to prevent a repeat of the global market volatility from the start of the year and may be working together to stabilise the FX market.
Central banks may have concluded that “stable policy and exchange rates and rising asset markets are better than the alternative”, said Steven Englander, Citigroup’s FX strategist.
The dollar’s decline yesterday was another example of its tendency to flip-flop since the start of the year. Dollar trading hit a year-to-date low of $1.07 in the value of the euro on January 5th. The euro-dollar exchange rate weakened to $1.1375 in February but has swung in both directions in recent weeks as traders struggle to read the Fed’s policy intentions.
Whatever the influence on the dollar, there has been no sign of a sustained dollar impetus since the December rate rise, and according to Alan Ruskin at Deutsche Bank, the history of Yellen speeches suggested there would not be one in the aftermath of the Fed chair’s latest public address.
“The median currency impact has been minimal for Yellen’s past speeches and testimonies. There is nothing here to suggest USD bulls should be holding their breath in the hope of immediate significant USD support,” Mr Ruskin said in a note. – (Copyright The Financial Times Limited 2016)
