Dollar Gains for Second Day as Yellen Reinforces December Hike

  • Fed Chair expects inflation pick up, warns of moving too slow
  • Haven currencies dip as Korea tension eases, risk tone muted

Belski Says Markets Should Be Excited by Higher Rates

The dollar extended gains in early afternoon trading as Federal Reserve Chair Janet Yellen said central bankers should be wary of raising rates too gradually. Yet the move proved fleeting as she said policy makers may have misjudged the strength of the labor market and forces behind inflation, prompting traders to unwind greenback purchases as a more neutral interpretation of her remarks prevailed.

Yellen said it was “imprudent to keep monetary policy on hold until inflation is back to 2 percent.” The Bloomberg Dollar Spot index rose as much as 0.6 percent to its highest in more than a month,  before giving back about half its gains. The euro hovered around 1.1800 versus the dollar, while Canada’s loonie rallied after Finance Minister Bill Morneau gave an upbeat assessment of the economy.

  • The odds of another quarter-point rate increase by year-end stand at about 65 percent, using the current effective fed funds rate and the forward overnight index swap rate. The probability was as low as 22 percent on Sept. 8
  • Yellen also said that downward pressures on inflation “could prove to be unexpectedly persistent” and that under certain conditions, “continuing to revise our assessments in response to incoming data would naturally result in a policy path that is somewhat easier than that now anticipated”
  • Earlier, Atlanta Fed President Raphael Bostic said he’s “pretty comfortable” with a December rate hike; Fed Governor Lael Brainard spoke on labor market disparities, but didn’t comment on the future path of monetary policy
  • EUR/USD was just shy of 1.1800. The pair earlier traded down to 1.1758, the lowest in more than a month, as U.S. traders sold early, joining model-driven accounts and others who had unwound longs overnight, according to traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. Some traders are now eyeing technical targets near 1.1700 or the August low at 1.1662
  • Markets are continuing to digest the weekend’s election that left Chancellor Merkel with the task of forming a coalition that will have broader implications for German and European economic policies and possibly impact ECB monetary policy. That outcome has cast a cloud over the shared currency as traders weigh the potential effect just as the central bank is trying to carefully shift to a less-accommodative stance
  • USD/JPY was trading around 112.30 after rising to a session high of 112.48. Market jitters over North Korea subsided and the 10Y Treasury yield rose to a new high for the day, fueled in part by hedging tied to a Saudi Arabia bond issue. USD/JPY may be anchored near 112.00 over coming sessions as a large 112.00 expiry rolls off Wednesday. For all the volatility, USD/JPY remains trapped in Monday’s 111.48/112.53 range
  • CAD rose to a fresh high for the day at 1.2331 after Finance Minister Morneau said he expects further rate hikes from the Bank of Canada. BOC Governor Poloz speaks Wednesday, text available on BOC website at 11:45am ET, and traders will parse remarks for guidance on path of future rate hikes following rate increases in July and September
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