Dollar Bulls Await Yellen as Citigroup Says Pessimism May Reign

Will the Fed Continue Hiking?
  • Dollar drops versus most of its 16 major peers this month
  • Odds of Fed rate increase in 2016 have fallen to 30%

Dollar bulls are looking to Janet Yellen for salvation. They may be disappointed.

The greenback has declined against all but one of 16 major currencies this month, while traders have pared the odds of a Federal Reserve interest-rate increase this year to 30 percent. Analysts are starting to examine the prospect of the U.S. following the euro area and Japan in adopting rates below zero if the economy deteriorates.

The Fed chair should “deflate” some of the enthusiasm for negative rates when she testifies before Congress Wednesday, and that may boost U.S. yields and support the dollar, according to Citigroup Inc.

“Her hope would be to unwind some of the bearishness that has engulfed asset markets, and this would be supportive for U.S. dollar, rates and equities,” Steven Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy, wrote in a note. “However, at times market pessimism is so deep seated that good news is viewed only as an opportunity to sell at better levels.”

The dollar dropped 0.2 percent to 114.94 yen as of 6:56 a.m. New York time, after falling to 114.21 Tuesday, the weakest level since November 2014. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, was little changed after losing 2.5 percent this month.

Euro Slides

The euro fell 0.3 percent to $1.1259, its first decline in three days and down from an almost four-month high of $1.1338 on Tuesday.

The euro was weighed down as stock markets in Europe rallied. Market sentiment was buoyed as Germany’s biggest bank, Deutsche Bank AG, was said to be considering bond buybacks to help ease concerns about its funds. The shared currency tends to weaken when market turmoil wanes because it’s often used to fund higher-risk trades.

“We’re in risk-on, risk-off mode and the euro is responding to what equities are doing,” said Eimear Daly, a currency strategist at Standard Chartered Plc in London. “Deutsche Bank shares are up as well, so it’s probably helping to support risk and so the euro is a bit lower.”

Change of Tone?

The dollar, the darling of currency investors last year, has been caught up in the turmoil sweeping financial markets. Investors are questioning whether the Fed can continue on a policy tightening path. And two weeks after officials signaled rates may rise more slowly than previously expected, markets will be trying to gauge Yellen’s readiness to delay tightening at the March meeting.

After saying the Fed is closely monitoring global developments before tightening, “Yellen can’t really be any more hawkish than to perhaps say every meeting is live for policy change,” said Sean Callow, a foreign-exchange strategist in Sydney at Westpac Banking Corp. “The market’s current mood is sufficiently downbeat and Yellen’s language likely to be sufficiently hedged that there won’t be a steep rally in U.S. dollar.”

The Fed chief is scheduled to appear before the House Financial Services Committee on Wednesday and will address the Senate Banking Committee Thursday.

With the odds of a U.S. rate increase having tumbled, it would be tough for Yellen to change the market’s outlook, said Stuart Bennett, London-based head of Group-of-10 currency strategy at Banco Santander SA.

“She might still well err on the positive side,” Bennett said. “I just wonder if in this current environment it is just going to fall on deaf ears.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE