Dollar Drops as Yellen Says Low Inflation Is Risk to Outlook

  • Loonie surges most in 16 months after Bank of Canada rate hike
  • Dollar-yen rebounds from drop under 113.00 after yields steady

BlackRock's Rosenberg Says Yellen Didn't Surprise Anyone

The dollar fell to a fresh low for the month after Federal Reserve Chair Janet Yellen expressed concern about persistently low inflation, while the Canadian dollar gained the most against its U.S. counterpart in 16 months after the Bank of Canada raised interest rates.

Yellen cited “uncertainty about when -- and how much -- inflation will respond to tightening resource utilization.” She also said the fed funds rate won’t need to rise much to reach “neutral,” however that level should rise over time, warranting further gradual hikes. While Yellen was testifying, the Bank of Canada raised its overnight target rate to 75 basis points as expected, with Governor Poloz noting that the output gap is likely to close by the end of this year amid strong employment.

  • The dollar endured choppy trading after Yellen’s text was released, initially posting gains before sliding to session low as Treasuries rose and the yield curve steepened. The dollar fell below 113.00 versus the yen and declined versus many G-10 peers while the Bloomberg dollar index ended the session down 0.4% with more than half that loss attributable to the Canadian dollar and the Japanese yen
  • USD/CAD plunged 2.3% to a session low of 1.2681 as the loonie soared on Poloz’s upbeat comments on the Canadian economy, gaining against all of its G-10 peers. Short-dated Canadian bonds slumped, with 2Y yields rising nearly 7bp to 1.18%
  • USD/JPY fell to a low at 112.93 before regaining a foothold above 113.00, the decline coming as the yield on the 10-year Treasury dropped as low as 2.30% after beginning the day ~2.35%. USD/JPY may have triggered stop-loss sell orders in the decline and after reaching 114.49 Tuesday, a four-month high
  • EUR/USD fell to a fresh low at 1.1392 amid choppy trading, with the EUR unable to gain ground even as the USD fell elsewhere, suggesting the market may be holding longs. EUR was also weighed by sales of EUR/GBP, which fell as the pound rose following stronger-than-expected U.K. employment data, and by sales of EUR/JPY, said traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. EUR/USD appeared to trigger stop-loss sell orders as it fell below 1.1420/25, and further stops are in place below 1.1380, one London-based trader said. Earlier, EUR succumbed to profit-taking after stalling near 1.1500, where offers are positioned and a large option expiry for Friday is set
  • EUR/GBP fell ~0.8% to a fresh session low at 0.8856 as GBP rose to a new high for the day above 1.2900. EUR/JPY declined more than 1% to near 129.00
  • USD was unfazed by Fed’s Beige Book that found modest-to-moderate wage and price pressures in the economy
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