Dollar index touched on 10-month low before recovering overnight



The U.S. dollar nursed its wounds near its lowest level in 10 months versus a basket of its major rivals this morning. The dollar struggled after Fed Chair Janet Yellen told House lawmakers yesterday that the U.S. economy remains on solid footing and that the central bank would likely continue normalizing monetary policy and likely soon begin the process of unwinding its massive balance sheet. However, Mrs. Yellen also pointed out that a generally low inflation backdrop would likely mean rates would “not have to rise that much further”. The gradualist and cautious tone to her comments weighed on U.S. bond yields and the dollar, particularly against higher yielding and riskier assets.

Investors will look to the second half of Mrs. Yellen’s testimony, this time before the Senate, later today. The prepared portion of her statement will likely mirror what was said yesterday but there remains room for potentially market-moving comments in the question and answer session. This morning, U.S. economic data showed a modest decline in weekly jobless claims to 247,000 last week from a revised 250,000 and a 0.1%(m/m) rise in wholesale inflation in June, slightly hotter than the unchanged reading that was forecast. Tomorrow’s data on consumer prices and retail sales remains a key focus for the dollar and broader global markets.

The euro backed off of a 14-month peak against the dollar as investors focused on the outlook for ECB monetary policy overnight. The head of Latvia’s central bank and a sitting ECB Governing Council member said the bank’s asset purchase program could remain in place for at least a “couple of years”, given that the outlook for inflation over this year and next remains well below the ECB’s 2.0% target. Separately, the Wall Street Journal reported that the ECB would likely announced the expected tapering of its 2.3 trillion-euro bond buying scheme in 2018 at either the bank’s September or October meetings.

Yesterday’s slightly cautious tone to Mrs. Yellen’s speech before U.S. House lawmakers suggested that lending rates in the world’s largest economy would likely rise at an extremely gradual pace. Global equities rallied and higher yielding units like the Aussie and New Zealand dollars outperformed along with riskier emerging market currencies.

USD: The dollar index was done no favors by Fed Chair Janet Yellen yesterday, who maintained that U.S. monetary policy would continue to be normalized but that the low inflation backdrop would likely mean rates may not have to rise that much further. Mrs. Yellen told House lawmakers yesterday that the economy remains on solid footing and that the process of unwinding the bank’s massive balance sheet would likely begin in the months ahead. Mrs. Yellen’s comments do not meaningfully change the outlook for the bank to likely lift U.S. borrowing costs one more time this year, probably in December. They did however remind investors that the “new normal” of lower global growth and inflation will likely keep the peak for borrowing costs, whenever that does occur, below levels that used to be more typical of tops of the economic cycle. Economic data, particularly on inflation (tomorrow’s CPI), will be very closely watched for any signs of mounting price pressures, which could ultimately make for a slightly more hawkish outlook for the Fed.

EUR: The euro was steady, under this week’s 14-month high against the generally softer U.S. dollar as investors digested the latest signals from the European Central Bank overnight. ECB Governing Council member IImars Rimsevics said that given the lowered inflation outlook for the 19-member bloc, it was likely that the ECB’s asset purchase program would likely remain in place for “a couple of years”. Separately, the Wall Street Journal reported that the bank would likely announce plans to taper its monthly asset purchases next year when it meets in either September or October. The prospect of more normal ECB policy remains supportive of the euro but an especially gradual and cautious normalization process could ultimately keep the euro’s gains in check.

GBP: Sterling rose to near a one-week high against the dollar following yesterday’s better than expected U.K. employment data. Investors remain on the fence about when the Bank of England will actually lift U.K. borrowing costs from record low levels. The notion that the BOE will eventually be the next G10 central bank to follow the Fed and the BOC down the path of higher borrowing costs continues to keep the pound well supported.

CAD: The Canadian dollar rose to over a one-year high against the greenback after the Bank of Canada delivered on an expected interest rate hike, its first increase in borrowing costs since 2010 yesterday. The hike in borrowing costs and the bank’s statement, which said the economy no longer needs the level of stimulus poured into it over recent years and largely left open the door to additional hikes in the coming months, sent the loonie soaring.

NZD: Fed Chair Janet Yellen’s commentary yesterday, which highlighted an extremely gradual pace of monetary normalization in the world’s largest economy, bolstered the appeal of higher yielding and riskier assets like the kiwi, which rose to a new five-month peak overnight.

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