The US dollar traded on a positive territory on Wednesday, following Federal Reserve Chairman Jerome Powell’s optimism over the US economy and support for the central bank’s plan to gradually raise interest rates.
The US dollar index, which tracks the greenback against a basket of six major currencies, edged higher by 0.3 percent to $95.05.
Powell’s upbeat statement pushed the dollar to its six-month high against the yen, as the pair added 0.06 percent to 112.96, after climbing as high as 113.08 earlier in the day, its strongest since January 9.
Senior FX strategist Junichi Ishikawa said the greenback stands to gain further, particularly against the yen, with risk aversion in the equity markets fading.
Less risk aversion was reflected on the US stocks, which strengthened overnight and helped bolster Asian shares on Wednesday, as a result of Powell’s positive assessment of the US economy.
The dollar also advanced 0.4 percent to 1.3247 against its Canadian counterpart, while it fell 0.01 percent to 1.000 against the Swiss franc.
While long-term Treasury yields are not rising significantly, that is a sign of investor demand for US assets that generates a degree of dollar-buying, added Ishikawa.
The 10-year Treasury yield steadied this week and was at 2.858 percent on Wednesday, although it has been steadily falling from a seven-year high above the 3 percent barrier set in May.
The 2-year Treasury note, which is the most sensitive to the market’s outlook on changes in Fed policy, has hit a decade-high and last stood at 2.615 percent.
For that reason, the US yield curve was at its flattest in 11 years and near inverting. An inverted yield curve occurs when the 10-year yield becomes lower than the 2-year yield. It sometimes acts as an indication of weakening confidence towards the economy and a signal for recession.
Market research head Tohru Sasaki said the correlation between yield curve and the dollar has been rather unstable and considering this, currencies are unlikely to react strongly when the curve does invert.
Powell Supports Rate Hike Views, Warns of Trade Uncertainty
With a better job market, inflation nearing the Fed’s goal, and the risks to the economic outlook roughly balanced, Powell reiterated on Tuesday that sticking with the central bank’s plan to steadily increase rates was the best way for the time being.
Powell said if they hike interest rates too slowly, it may result to high inflation or financial market excesses, then again, if they lift rates too quickly, the economy could weaken and inflation might move below their objective.
Powell, along with his fellow Fed policymakers expects the job market to remain strong and inflation to stay close to its 2 percent target over the next several years.
However, uncertainty concerning the ongoing trade tensions made it difficult for the central bank to predict the outcome of the current trade policy discussions, as well as the size and timing of the economic effects of the recent changes in fiscal policy.
Powell also noted that protectionism could risk restraining economic growth, seeing countries that have remained open to trade that have not put up barriers, including tariffs, have grown faster, had higher incomes, and better productivity.
In addition, trade worries might affect wages and capital expenditures (capex), although the Fed does not have an estimate yet, but Powell stated that they have heard a growing chorus of concern which now starts to suggest an actual capex plan being delayed for the moment.
Overall, the central bank sees the possibility of the economy unexpectedly weakening to be more or less balanced, with the prospect of the economy expanding quicker than they have currently expected.
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