Yellen stays flexible on rate move
Federal Reserve chief pledges to be ‘patient’ on starting to raise borrowing costs in the US
Currency volatility is poised for its biggest weekly drop since 2010 after Federal Reserve Chair Janet Yellen reiterated on Wednesday that the central bank’s timetable for raising interest rates is flexible.
A gauge of the dollar remained weaker following Yellen’s testimony to a House committee, a day after she told a Senate panel that the labor market was improving even as inflation and wage growth remain too low. A measure of expected currency swings has fallen for the past three days as euro-region finance ministers agreed to a package of economic measures for Greece on Tuesday. Australia’s dollar slumped after a report showed business spending declined more than analysts forecast.
“Yellen did a good job of containing markets from racing ahead” with bets for higher rates and a stronger dollar, said Satoru Igarashi, a senior foreign-exchange strategist at Mizuho Securities Co in Tokyo. “Volatility is falling considerably.”
Trader expectations for price swings in foreign-exchange markets was 9.03 percent as of 6:50 am in London on Thursday, set to match its lowest closing level since Dec 9, according to Deutsche Bank AG’s Currency Volatility Index. It spiked to a three-year high of 12.5 percent on Jan 16. The 1.39 percentage point decline this week would be the biggest since June 2010.
The dollar bought 118.96 yen from 118.86 yen in New York, and was little changed at $1.1365 per euro.
Fed’s pledge
Yellen repeated that the Fed’s pledge to be “patient” on starting to raise borrowing costs means an increase is unlikely for “at least the next couple” of meetings. The central bank adopted the guidance in December and repeated it in January.
She added that a rate increase “could be warranted at any meeting”. The Fed has held its target for the federal funds rate at virtually zero since December 2008 to bolster economic growth.
“Yellen’s second day of testimony wasn’t as hawkish as everyone hoped, so while there’s still a chance of a June rate hike, people are now thinking the timing may be a little later,” said Kazuo Shirai, a Los Angeles-based trader at MUFG Union Bank NA. “The dollar continues to see some selling on the back of that.”
The Bloomberg Dollar Spot Index, a gauge of the currency versus 10 major peers, was little changed at 1,163.49 from 1,163.13 in New York. Before Yellen spoke on Tuesday, the measure had climbed to almost the Feb 11 peak, which was its highest in data going back to 2004.
Traders see a 55 percent chance the Fed will raise the benchmark by its October meeting, according to futures data compiled by Bloomberg. That’s down from 59 percent on Monday.
US growth
The dollar has been supported in 2015 by an improving economy. Gross domestic product will expand 3.1 percent this year, compared with 2.14 percent across the Group of 10, according to economists surveyed by Bloomberg News.
Data on Thursday may show consumer prices in the world’s largest economy dropped last month for the first time since 2009. The consumer price index probably slipped 0.1 percent from a year earlier, according to the median estimate of economists in a Bloomberg survey.
The dollar is the best performer in a basket of 10 developed-nation peers over the past year, gaining 15.1 percent, according to Bloomberg Correlation-Weighted Indexes. The yen declined 2.6 percent while the euro dropped 6.4 percent.