Yellen Drives Dollar Toward Strongest Week in Two Months

The dollar was set for its biggest weekly advance in two months versus major peers before Dallas Federal Reserve President Richard Fisher speaks today amid prospects the central bank will pare stimulus.

The greenback reached a two-week high against the euro yesterday, the day after Fed Chair Janet Yellen said borrowing costs could start rising “around six months” following an end to the U.S. central bank’s bond buying. Fisher, who votes on policy this year, said this month that the Fed’s asset purchases are “distorting” financial markets. Australia’s dollar was set for a weekly advance after a gauge of economic surprises rose to a 10-month high.

“We are in for a little bit of dollar strength here,” said Ray Attrill, the global co-head of currency strategy in Sydney at National Australia Bank Ltd. “I’d imagine that what Yellen said about the six months was music to Mr Fisher’s ears.”

The Bloomberg Dollar Spot Index, which monitors the U.S. currency against its 10 major counterparts, was at 1,020.99 as of 6:51 a.m. in London from 1,021.54 yesterday. It has climbed 0.8 percent since March 14, poised for the steepest weekly advance since Jan. 17.

The U.S. currency was little changed at $1.3788 per euro after touching $1.3749 yesterday, the strongest since March 6. It bought 102.38 yen from 102.39. Europe’s shared currency traded at 141.15 yen from 141.07.

Japan’s markets are shut today for a national holiday.

Fed Decision

Fisher will speak about forward guidance in London today. He said on March 5 the Fed’s asset-purchase program is creating incentives for investors to take excessive risk, some of which may end result in tears.

The policy-setting Federal Open Market Committee discarded a jobless-rate threshold on March 19 for considering when to increase borrowing costs and said it will look at a wider range of data. The benchmark interest-rate target has been held at zero to 0.25 percent since 2008 to support the economy.

Policy makers reduced monthly bond buying by $10 billion to $55 billion and said the purchases will be slowed in “further measured steps.” Economists surveyed by Bloomberg before the March 18-19 meeting forecast officials would announce an end to the program in October.

Yellen said she saw a “considerable time” between the end of the stimulus and the first rate increase, meaning “around six months or that type of thing.” She spoke at a press conference after presiding over her first policy meeting.

‘Face Value’

“We take the word of Mrs. Yellen basically at face value in terms of when potentially the Fed might embark on this tightening process.” said NAB’s Attrill. The FOMC meeting this week is a “game changer,” he said.

Even so, Deutsche Bank AG’s Currency Volatility Index has declined 35 basis points this week to 7.28 percent. The gauge for three-month implied volatility on nine major currency pairs reached 7.14 percent on March 12, the lowest since December 2012.

“Because the FOMC’s updated guidance lacks clarity, market participants may become uncertain about the FOMC’s ‘reaction function’ to the flow of improving U.S. economic data,” Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank, wrote in a note yesterday. “Increased uncertainty about the FOMC’s reaction function may lead to more volatility in asset markets, including higher implied volatility on USD pairs.”

Weekly Moves

The greenback has strengthened against eight of its 10 developed-nation counterparts this week, with only the Australian and New Zealand dollars climbing. The U.S. currency has advanced 1 percent versus the yen during the period and 0.9 percent against the euro.

The Aussie rose 0.3 percent to 90.63 U.S. cents today, extending its weekly advance to 0.4 percent. Citigroup Inc.’s Economic Surprise Index for the nation was at 50.10 yesterday after reaching 50.60 on March 13, the highest since May 23. A positive reading signals data releases exceed economist estimates.

The Aussie “may yet prove to be more like Wile E. Coyote from the ‘Road Runner’ cartoons, who often runs off of high cliffs and hovers in thin air for some time before gravity finally kicks in,” Michael Every, the Hong Kong-based head of financial markets research for Asia-Pacific at Rabobank International, wrote in a research note today. “It’s not clear what’s the market equivalent of ‘Meep Meep!’”, he wrote, referencing the cartoon character’s characteristic call.

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