Yellen’s Dovish Comments Stall Dollar Rally

The dollar weakened against the euro in late trading yesterday after Janet Yellen – who is widely tipped to take over from Ben Bernanke as Chairman of the Federal Reserve – defended the central bank’s stimulus programme as a means of encouraging growth.

On Wednesday, Yellen released prepared remarks to the confirmation hearing before the Senate Banking Committee, but answered direct questions on the topic of tapering on Thursday. Her remarks have dampened expectations that the Fed will begin tapering its bond-buying programme sooner rather than later, which had been raised by the release of better-than-expected economic data.

Although there was a degree of trepidation about the Q & A session with Yellen among analysts, the vice chair of the Fed steered clear of creating any controversy.

The euro was down against the dollar for most of yesterday after economic data from the eurozone suggested that growth was weakening. The data showed that the  eurozone had only narrowly emerged from recession in Q3 with growth of 0.1%, with this figure being weighed upon by a contraction in the French economy.

EUR/USD November 14 2013Source: FXstreet.com

EUR/USD November 14 2013
Source: FXstreet.com

 

Upon the release of this news, the euro fell to a low of $1.3417 from an earlier peak of $1.3497, but recovered most of those losses after Yellen spoke. It seems likely that the euro will stay above the low of $1.3295 touched last week after the ECB cut interest rates, unless the central bank opts for more easing measures. On Wednesday, ECB Executive Board member Peter Praet raised the prospect of the central bank adopting negative interest rates or buying assets from banks in order to stave off the prospect of deflation.

Meanwhile, the dollar surged to a two-month high against the yen after Japan’s finance minister Taro Aso indicated a willingness to engage in currency intervention. The dollar was up 0.8% to 99.98 yen after he told a parliamentary committee that Japan must retain currency intervention as a policy tool and be ready to take action when markets are excessively volatile. The dollar was further boosted against the low-yielding yen by Yellen’s remarks, briefly pushing the dollar above the 100 yen mark for the first time since September 11.

An upbeat assessment of the UK economy by Bank of England Governor Mark Carney on Wednesday gave the pound a slight boost, and raised speculation that UK interest rates might rise earlier than had been forecast. Sterling was up 0.1 percent at $1.6077 despite disappointing UK retail sales data.