Dollar Declines as Traders Seek Yellen Clarity Amid Fed Rhetoric

Dollar Retreats Before Jackson Hole Meeting
  • Currency drops for second day, falling versus most G-10 peers
  • Commerzbank recommends being ‘cautiously short’ the greenback

The dollar weakened versus its major peers, approaching a three-month low reached last week, before a speech by Federal Reserve Chair Janet Yellen that may offer hints on the path of U.S. interest-rate increases.

The U.S. currency dropped against most of its Group-of-10 counterparts as investors awaited Yellen’s address to the annual Jackson Hole symposium amid uncertainty about how quickly the Fed plans to tighten monetary policy. Futures indicate the probability of a dollar-boosting rate hike this year at 55 percent -- up from 36 percent at the start of the month.

Investors are hoping for some description of economic conditions in Yellen’s first public comments since June, yet the formal topic of the speech -- “The Federal Reserve’s Monetary Policy Toolkit” -- implies a technical focus on the challenges facing the central bank in an era of tepid growth and slow inflation. Fed Bank of Dallas President Robert Kaplan said Friday that U.S. rates should only rise gradually to avoid destabilizing the rest of the world.

“Yellen is most likely to stick to the subject and not talk about the present situation,” said Steven Barrow, head of currency strategy at Standard Bank Group Ltd. in London. “That probably won’t give the market much to go on, but may prove more bearish than bullish for the dollar just on the basis that the market seems perturbed by some of the more hawkish comments we’ve heard from some of the Fed presidents lately.”

The Bloomberg Dollar Spot Index fell 0.3 percent as of 8:54 a.m. in New York, reducing its weekly advance to 0.1 percent. The greenback lost 0.2 percent to $1.1304 and declined 0.3 percent to 100.20 yen.

‘Destabilizing Effects’

The central bank should raise rates “patiently and gradually and cautiously,” Kaplan said in a Bloomberg Television interview in Jackson Hole on Thursday, citing the “potentially destabilizing effects on the rest of the world.”

Fed Bank of Kansas City President Esther George repeated her case that higher rates are warranted with the U.S. nearing full employment and inflation rising toward the central bank’s target. Top officials including New York Fed chief William Dudley and John Williams of the San Francisco Fed have signaled recently that a rate increase may be on the table in coming months.

There’a a 30 percent chance of a boost to U.S. borrowing costs at the Fed’s next meeting on Sept. 21, up from 18 percent on Aug. 1, futures prices suggest.

“Being cautiously short-dollar at this point makes sense,” said Ulrich Leuchtmann, the Frankfurt-based head of currency strategy at Commerzbank AG, referring to a bet the currency will weaken. “Don’t expect Yellen to give clear guidance in Jackson Hole.”

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