Dollar Rally Stutters as Traders Wary Yellen to Side With Doves

  • Currency snapped best run of gains in two months on Monday
  • U.S. economy vulnerable to global factors, Fed's Williams says

Dollar bulls have turned cautious after last week pushing the currency to its longest run of daily gains in two months.

Investors will watch for clues on the path of monetary policy when Federal Reserve Chair Janet Yellen speaks Tuesday at the Economic Club of New York. San Francisco Fed President John Williams damped enthusiasm for the dollar on Monday, saying the economy is vulnerable to global developments, echoing the Federal Open Market Committee’s March statement. Fellow policy makers James Bullard and Patrick Harker signaled this month interest rates may rise as soon as April.

“Williams’s comments about overseas factors impacting the U.S. are allowing the U.S. dollar to ease a little,” said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand in Auckland. “Markets are wary that Yellen will reaffirm the cautious FOMC statement, undermining dollar-specific optimism.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.1 percent as of 7:12 a.m. in London after sliding 0.4 percent on Monday and snapping a six-day rally, the longest since Jan. 20. The dollar advanced 0.1 percent to 113.61 yen and gained 0.1 percent to $1.1186 per euro.

‘Some Tightening’

The Fed left its benchmark unchanged at its March 15-16 meeting and trimmed projections for how many rate increases it expects to make this year. The shift reflected “a somewhat slower projected path for global growth, for growth in the global economy outside the United States, and for some tightening in credit conditions,” Yellen said at a press conference.

There’s a 73 percent chance the Fed will raise rates this year, compared with 80 percent odds before this month’s decision, according to data compiled by Bloomberg based on fed fund futures.

Bloomberg’s dollar index rose 1.5 percent in its six-day rally that ended March 25. The gauge has still fallen 2.8 percent this year.

“The Fed’s in a bind as it wants to raise rates but doesn’t want the dollar to strengthen, which risks undermining the economy,” said Naohiro Nomoto, an associate for currency trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “If Yellen disappoints, the dollar will face selling pressure.”

Payroll Survey

While inflation has lagged behind the official goal of 2 percent, unemployment has fallen to an eight-year low and a Bloomberg survey projects the April 1 payroll report will show employers added 210,000 workers in March.

The global economy, particularly China and Brazil, is having a significant impact on measures that U.S. policy makers watch to determine rates, said Williams, who doesn’t vote on monetary policy this year.

St. Louis Fed President Bullard said on March 23 the FOMC should consider raising rates in April. Philadelphia Fed President Harker said last week the U.S. economy is resilient, and he’d support a quarter-point increase if that continues.

“I’m still bearish on the U.S. dollar for the next few months, but I’m certainly bullish over the longer term,” said Gareth Berry, a foreign-exchange strategist at Macquarie Bank Ltd. in Singapore. “It will be hard for the Fed to ignore the steadily improving U.S. economy, and ultimately that will push them into a rate hike later this year.”

Before it's here, it's on the Bloomberg Terminal.