Dollar Gains Versus Yen as Yellen Cites FOMC View on Hike Need

  • Chair says majority of committee sees increase likely needed
  • Greenback restrained as traders want more proof on economy

The dollar strengthened against the yen as Federal Reserve Chair Janet Yellen said the majority of the central bank’s policy-setting group sees an interest-rate increase as likely needed this year.

The greenback advanced against a handful of major peers as a slate of officials spoke Wednesday, including one of the dissenters who voted in favor of a rate hike at last week’s policy meeting -- Fed Bank of Cleveland President Loretta Mester said labor-market gains and the inflation outlook justify a rate hike.

The greenback is down about 4 percent this year as traders have lost faith in the prospect that U.S. rates will diverge from Europe and Japan, where central banks have pursued unprecedented monetary stimulus. Futures imply almost a 55 percent probability that the Fed will boost rates by December, and traders said they want to see more signs of economic strength to ramp up bullish dollar wagers. While policy makers last week projected one rate increase ahead in 2016, they also reduced forecasts for tightening in coming years.

“It’s hard for the Fed to be anywhere near hawkish when they just delivered a very dovish message last week,” said Win Thin, global head of emerging markets at Brown Brothers Harriman & Co. in New York. “The market is waiting for the next driver,” especially labor data next week.

The dollar gained 0.3 percent to about 100.70 yen and was little changed at $1.1217 per euro. The greenback fell against currencies of crude-producing countries after OPEC agreed to a preliminary deal that will cut production. A Bloomberg index of the dollar’s strength is down about 0.4 percent this quarter.

Yellen’s Timetable

Yellen, in remarks before the House Financial Services Committee, also said there’s no fixed timetable for raising rates.

Fed Vice Chairman Stanley Fischer said Tuesday low rates have helped deliver U.S. labor-market gains that are feeding through to higher wages. While he didn’t discuss the timing of any increase in borrowing costs, he said the move in wage inflation from about 2 percent last year to about 2.5 percent this year provides evidence of the connection between unemployment and inflation.

Citigroup Inc.’s U.S. Economic Surprise Index, while still below zero, has recovered from the lowest since July. A level below zero indicates data are falling short of forecasts.

Even as the dollar is little changed on the quarter when measured broadly, it has lost ground against currencies of economies where rates are higher, in particular the South African rand.

“This reflects that signaling a possible rate hike three months in advance is not enough to derail the reach for yield," said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank.

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