Dollar Declines After Yellen Says Fed Rate Hikes Will Be Gradual

Yellen: Case to Raise U.S Rates Is Getting Stronger

The dollar extended losses after Federal Reserve Chair Janet Yellen said the central bank will take a gradual approach to raising interest rates.

The greenback fell versus most major peers as Yellen said policy makers’ plan for a modest path to higher rates is based on expectations for moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2 percent over the next few years. In a speech in Jackson Hole, Wyoming, she also said the case to raise rates is getting stronger as the U.S. economy approaches the central bank’s goals.

"There’s no time commitment on that hike," said Richard Cochinos, London-based head of Europe Group-of-10 currency strategy at Citigroup Inc., the world’s biggest foreign-exchange trader according to Euromoney magazine. "They are looking at lower natural interest rates in the U.S. That doesn’t give the market any reason to buy dollars aggressively."

Investors’ sentiment has oscillated in recent weeks on the pace of Fed monetary tightening after it raised borrowing costs in December for the first time since June 2006. The dollar’s 5 percent loss this year reflects a dimming outlook for the U.S. central bank to reduce stimulus and diverge from unprecedented easing in Europe and Asia.

Bloomberg’s Dollar Spot Index, which tracks the currency against 10 peers, dropped 0.5 percent as of 10:29 a.m. in New York.

“If the market draws the conclusion that the Fed is merely upping the odds of a rate hike or two to ‘get it over with’ and nothing else, there is little U.S. dollar impact on the idea of being one- or two- and done,” John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark, said via e-mail.

While the minutes from the Federal Reserve’s July meeting showed divisions within the rate-setting committee, New York Fed President William Dudley and San Francisco Fed President John Williams have signaled that a hike may be coming by year-end. Fed Bank of Kansas City President Esther George said inflation gains call for a near-term rate increase.

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