Currency Swings Soar to 2012 High as Yellen Comments on Turmoil

Yellen: No Known Restriction Preventing Negative Rate
  • Financial conditions are `less suportive,' Fed chair says
  • Implied volatility in euro-dollar rises to two-month high

Foreign-exchange volatility climbed to the highest level since 2012 as Federal Reserve Chair Janet Yellen signaled continuing market turmoil may hurt the prospect of multiple interest-rate increases this year.

The yen rallied to the strongest level against the dollar since October 2014 while a gauge of the U.S. currency reached a three-month low. Implied one-month volatility for the euro versus the dollar rose to a two-month high on Wednesday while a similar measure of swings for the yen against the greenback remained near the highest since July 2013.

Eight weeks after raising rates for the first time in nearly a decade, Fed officials are struggling to judge whether financial market turmoil and a dimmer outlook abroad undermine their U.S. economic forecast and the need for additional policy tightening. Traders have reduced expectations for a rate increase this year to a less than 50 percent likelihood.

“This is generally negative for risk appetite,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “Markets were clamoring for more -- look at the profound unwinding of Fed expectations.”

Euro-dollar price swings jumped to 12 percent as of 5 p.m. in New York, with yen volatility at 13.3 percent, options prices show. JPMorgan Chase & Co.’s global measure of currency volatility was at 11.9 percent, reaching its highest on a closing basis since June 2012.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, dropped 0.3 percent to 1,217.08. The yen rose 1.5 percent to 113.40 per dollar.

Market Sentiment

“This will leave us still in the current regime of slightly risk-off sentiment,” said Alessio de Longis, a New York-based money manager in OppenheimerFunds Inc.’s global multi-asset group, which manages $5 billion. This “will definitely continue to support the yen.”

Price swings in currencies, bonds and stocks remain elevated on concern a slowdown in China will translate into subdued growth elsewhere. Yellen addressed both in her address to Congress, saying that uncertainty about China’s economic prospects and exchange-rate policy had “exacerbated concerns about the outlook for global growth” and contributed to the latest drops in oil and other commodities.

Yellen kept the door open for a rate increase in March, although she didn’t explicitly refer to any tightening timeline or the Fed’s next meeting. Policy makers next gather to consider a rate change on March 15-16.

“Financial conditions in the United States have recently become less supportive of growth,” Yellen said. “These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market.”

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