Dovish Yellen Fuels Bearish Response by U.S. Dollar; Rate Hike This Year is Doubtful
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Last week’s Forex price action was driven primarily by dovish comments from Federal Reserve Chair Janet Yellen and a mixed U.S. Non-Farm Payrolls report. Yellen’s comments were especially bearish for the U.S. Dollar against a basket of foreign currencies. This was highlighted in the June U.S. Dollar Index futures contract which finished the week at 94.618, down 1.62%. It should be noted that it wasn’t stronger currencies that drove the index lower, but the weaker dollar.
The dollar started the week flat-to-higher on Monday after the long Easter weekend as investors continued to digest the hawkish comments from a chorus of Fed officials the previous week. These remarks suggested the Fed could raise interest rates as soon as the April monetary policy meeting.
Highlighted the previous week were hawkish comments from St. Louis Fed President James Bullard who stated another interest rate hike “may not be far off.” This was followed by Fed President John Williams who told CNBC the U.S. economy was doing “quite well” and that global developments are preventing the United States from returning to normalized interest rates.
On March 29, Yellen, speaking to the Economic Club of New York, tempered the hawkish comments by the Fed officials when she said the Federal Reserve should proceed with caution in adjusting policy, acknowledging that economic and financial conditions are in some respects less favorable now than in December.
Yellen said that research suggests that, with a funds rate at zero and increased uncertainty, the best policy is greater gradualism. Still, the Fed can hike if the economy grows faster, she said. But if the economy falters, she added, the Fed can “provide only a modest degree of additional stimulus.”
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