Dollar’s bullish sentiment Thursday was dragged down on Friday trade as Federal Reserve Chairwoman Janet Yellen changed her hawkish take and stated rate hikes that are seen to take a more gradual pace for this year. The Fed chairwoman’s tamed hawkishness seems to have caught the market off-guard as investors await US President-elect Donald Trump’s inauguration.
Fed Chair Yellen’s speech at the Stanford Institute for Economic Policy Research dampened the greenback’s steam early Asia trade.
In her speech, the Fed chair remarked how interest rates should be raised gradually by the US central bank if the steady rise of jobs and the squat inflation are to be kept so as to avoid stunting the upturn that the Fed has long tried to cultivate.
According to FPG Securities President Koji Fukaya, the reason why Yellen sounded less hawkish for some is due to the fact that during her speech, the US central bank chair did not specifically discuss plans on accelerating the pace of this year’s rate hikes.
This was a huge contrast to her previous speech which sent the greenback on bullish Wednesday and can be compared to Trump’s remarks that sent the US currency bearish on Tuesday and late Thursday.
Volatility as Uncertainty Looms
The buck gained as much as 1 percent following Yellen’s speech Wednesday, regaining investor confidence over solid growth and growing inflation that kept sent the currency on the positive territory after the Trump victory-induced rally since November 8 (1)—although the currency has long been highly volatile (2) after that.
The US Dollar Index (DXY) reached a 101.73 high on Thursday as US jobs and housing data gets a stronger outlook, with the real estate sector experiencing sharp rebounds in December as economic standing starts to firm heightening demand for rental housing. Also, unemployment benefits filed by Americans unexpectedly dropped to its lowest level in decades.
However, DXY fell 0.2 percent to 100.96 (3) and was said to be on track to incur a 0.2 percent loss for the week.
The dollar is still in the middle of its worst four-week performance since August, as a correction that began in the latter part of December suggests. This reflects that anxiety and concern still shrouds Trump’s possible preference for a weaker dollar and may consequently stir up further global political uncertainty.
As of the moment, forecasts of additional dollar gains are currently dependent on the three rate increases projected to happen within the year.
One’s Word Against Another’s
"We have washed out a few positions this week and we're back to thinking about the underlying fundamentals," said CIBC London head of currency strategy Jeremy Stretch.
"Yellen's comments are interesting and constructive overall ... but the market does not want to be caught long ahead of the president-elect speaking (on Friday). For now it is cautious dollar buying rather than anything stronger."
The greenback’s sell-off on Tuesday came following Donald Trump’s speech where he remarked how the US currency’s solid gains were becoming a huge disadvantage to the country especially when it comes to its Chinese trade deals and also hinted that the Republican proposal regarding border taxes might be ditched after all, despite the projections that the move will help boost the dollar further.
"Of all the speakers we're getting ... the one I'm going to listen to most for now will probably still be Janet Yellen," said Kit Juckes, strategist at Societe Generale.
"As the U.S. economy approaches full employment, as wages rise but inflation rises nearly as quickly, how hawkish the Fed dares to be will determine how much the dollar rises."
The currency market, especially the dollar is seen to remain highly volatile amid political uncertainties that seem to slowly rise up in every turn of the clock.
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