Dollar Falls as Yellen Says Economy Still Needs Fed’s Stimulus

The dollar fell the most in three weeks as Federal Reserve chairman nominee Janet Yellen said the economy must improve before monetary stimulus can be trimmed.

The pound gained after the Bank of England improved its outlook for unemployment in its quarterly inflation report. The euro erased losses against the dollar amid bets the decline was excessive as traders bet that the European Central Bank won’t embrace quantitative easing anytime soon. The dollars of commodities producers Canada, Australia and New Zealand all climbed after Yellen’s announcement. U.S. stocks rose to a record.

“Yellen proved as dovish as the market had expected and wanted,” Douglas Borthwick, the head of foreign exchange at Chapdelaine & Co. in New York, said in a phone interview. “The Fed taper is obviously off the table, in her mind, and the dollar sells off on the back of that.”

The Bloomberg U.S. Dollar Index, which monitors the greenback against 10 major counterparts, fell 0.4 percent to 1,018.48 as of 5 p.m. in New York, the biggest drop since Oct. 22. The gauge reached 1,025.01 yesterday, the highest since Sept. 13.

The euro rose 0.4 percent to $1.3487 after falling as much as 0.3 percent. The yen gained 0.4 percent to 99.25 per dollar after sliding to 99.80 yesterday, the weakest level since Sept. 13. Japan’s currency traded at 133.85 per euro.

Yellen Appearance

The Standard & Poor’s 500 Index of stocks gained 0.8 percent to 1,782, reclaiming its record on a closing basis for the first time since Oct. 29.

“The equity market isn’t worried about tapering, why should the currency market be worried about it?” Yra Harris, the chief trader and analyst at Praxis Trading in Chicago, said in a telephone interview.

Related: Yellen Says Economy Performing ‘Far Short’ of Potential

Unemployment is “still too high, reflecting a labor market and economy performing far short of their potential” and that inflation is “expected” to remain below the Fed’s goal for 2 percent price increases, Yellen said in testimony prepared for her nomination hearing tomorrow before the Senate Banking Committee.

Yellen will be defending quantitative easing, a policy of buying bonds to drive down yields and lift asset prices, which has swelled the Fed’s balance sheet to almost $4 trillion while facing four Republicans who voted “no” on her 2010 successful bid to be vice chairman.

The U.S. Federal Reserve will pare its bond-buying program to $70 billion at its March 18-19 meeting from the current pace of $85 billion, according to the median of 32 economist estimates in a Bloomberg News survey on Nov. 8.

ECB Outlook

The euro dropped earlier as factory production in the region dropped 0.5 percent after rising 1 percent in August, Eurostat said. Economists surveyed by Bloomberg predicted a decline of 0.3 percent. GDP growth slowed to 0.1 percent in the third quarter, from 0.3 percent in the previous three months, a separate survey showed before tomorrow’s report.

Europe’s shared currency strengthened earlier after the ECB’s Peter Praet said negative rates and asset purchases remain an option, according to a Wall Street Journal article.

The euro declined the most in two years on Nov. 7 after ECB President Mario Draghi unexpectedly cut its main refinancing rate to a record-low 0.25 percent, saying “monetary-policy stance will remain accommodative for as long as necessary.” Europe’s inflation unexpectedly slowed in October to 0.7 percent. That compares with an ECB target of “close to but below” 2 percent.

‘Low’ Likelihood

“This is really the first time in recent history an ECB policy maker suggests QE is possible in the euro zone,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a telephone interview. “I’d take it with a grain of salt. The likelihood of such a scenario is still quite low.”

The pound climbed versus all but one of its 16 major peers after the office for National Statistics said the jobless rate as measured by International Labour Organisation standards fell to 7.6 percent in the three months through September.

Unemployment is more likely than not to reach 7 percent in the third quarter of 2015, based on the path of interest rates projected by investors, the Bank of England said in the Inflation Report. Policy makers have said they will increase the benchmark rate from a record-low 0.5 percent after unemployment falls to 7 percent.

Pound ‘Positive’

“Both the Bank of England’s new projections and the development in terms of employment should be positive for the pound,” said Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London. “The pound has room to strengthen further although some may argue that a lot of that has already been in the price.”

Sterling strengthened 0.6 percent to 83.99 pence per euro after weakening 0.8 percent yesterday. The pound rose 1 percent to $1.6057 after falling to $1.5855 yesterday, the lowest since Sept. 13.

The krona dropped for a second day versus the euro as Borg told reporters in Stockholm that deflation was a serious concern.

The krona fell 0.3 percent to 8.9617 per euro after sliding to 8.9987, the weakest level since June 2012. The currency rose 0.1 percent to 6.6423 per dollar.

Canada’s dollar, known as the loonie, rose 0.4 percent to C$1.0457 per U.S. dollar. The Aussie dollar climbed 0.6 percent to 93.60 U.S. cents. New Zealand’s currency, the kiwi, gained 0.8 percent to 82.89 U.S. cents.

The euro gained 6.4 percent this year, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 3.8 percent and the yen tumbled 11 percent.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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