Dollar Heads for Worst Month Since 2011 on Slower Fed Rate Path

Deep Dive Into Janet Yellen's Economic Club Speech
  • U.S. currency slumps versus 15 of 16 major counterparts
  • Foreign-exchange volatility near highest level in one month

The dollar headed for its worst month in five years as Federal Reserve Chair Janet Yellen signaled the central bank would act “cautiously” as it looks to raise U.S. interest rates against a backdrop of deteriorating global economic growth.

The greenback weakened versus 15 of its 16 major peers after Yellen indicated the Fed won’t rush to tighten policy. Economic and financial conditions are less favorable than when the Fed last raised rates in December, she said in a speech to the Economic Club of New York.

“We were prepped for a dovish Yellen, but somehow she still managed to exceed our own expectations,” said Bipan Rai, executive director of foreign-exchange strategy in Toronto at Canadian Imperial Bank of Commerce’s CIBC World Markets unit.

The dollar weakened as traders weigh the likelihood of interest-rate increases this year, which help to determine the relative allure of the U.S. currency. Policy makers including St. Louis Fed President James Bullard and San Francisco Fed President John Williams said last week that a hike as soon as next month is possible. Yellen’s comments Tuesday suggest that is unlikely and sent the greenback tumbling.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, declined 0.8 percent as of 5 p.m. in New York, headed for its biggest monthly loss since April 2011. The U.S. currency dropped 0.9 percent to $1.1291 per euro and fell 0.7 percent to 112.70 yen.

A JPMorgan Chase & Co. gauge of foreign-exchange price swings was at 11.33 percent after reaching the the highest since Feb. 29 on a closing basis Monday.

Inflation Headwind

Global developments -- particularly regarding China -- pose ongoing risks to the Fed’s outlook, Yellen said. Appreciation by the dollar -- which gained 9 percent in 2015 and 11 percent a year earlier -- is still expected to weigh on inflation in months to come, she said. Consumer prices will move toward the Fed’s 2 percent target over the course of 2017 and 2018, assuming no further swings in energy prices or the dollar.

Traders are scrutinizing Fed comments for indications of whether policy makers will look to increase interest rates in April or June. Traders slashed the likelihood of a rate increase in April to zero, down from 6 percent on Monday, and lowered the probability of a hike in June to 26 percent from 38 percent, based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase.

“The dollar is selling off on the cautious comments from the Chair,” said Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California. “The speech certainly has more of a dovish overtone than recent bullish comments by other Federal Reserve members.”

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