Janet Yellen just instilled some doubt in dollar bulls.
The Federal Reserve chair acknowledged the negative consequences of this year’s gains Wednesday, saying the currency is weighing on U.S. exports and inflation as policy makers pared back their outlook for interest-rate increases. That sent the greenback down by the most since 2009, though it rebounded Thursday to continue its rally of 14 percent over the past six months.
“They clearly do care about the dollar, and the Fed’s important for the dollar trend,” Jens Nordvig, managing director of currency research at Nomura Holdings Inc. in New York, said by phone. “We’re going to have a couple of months of consolidation.”
The dollar’s ascent has been fueled by the Fed’s plans to raise borrowing costs this year at a time when central banks are easing from the euro area to Canada and Australia. Sweden’s Riksbank became one of the latest to drive down its currency this week, lowering its key interest rate outside of its schedule for policy decisions.
The Fed’s indication that it will raise rates more slowly than it previously predicted sent the Bloomberg Dollar Spot Index down 1.8 percent Wednesday to 1,194.89, the biggest drop since March 2009. The index — which is weighted against peers including the euro and yen — climbed 0.9 percent Thursday to 1,205.22 as of 9:16 a.m. London time.
The Fed “can’t ignore the stronger dollar’s implications for growth,” Alan Ruskin, the global head of Group of 10 foreign exchange at Deutsche Bank AG in New York, said by e- mail. “The U.S. dollar’s gains have reached the point where they are willing to indirectly protest dollar strength.”
Policy makers cut their estimate for the federal funds rate at year-end to 0.625 percent, down from a forecast of 1.125 percent in December. The outlook for 2016 fell to 1.875 percent from 2.5 percent.
The greenback has something to do with the cuts to those projections. Yellen, who also lowered her assessment of the economy, said the strong dollar has weighed on consumer prices and contributed to weak export growth and low import prices.
“It puts the U.S. dollar increasingly on the radar — now we know the Fed has its eye on it, and the impact on exports and growth,” Matt Derr, a foreign-exchange strategist at Credit Suisse Group AG in New York, said by e-mail. “We are just seeing some consolidation after a very strong U.S. dollar move in recent months.”
While Yellen has downplayed the notion of a global currency war, the Fed has stood out for its plans to raise rates as other nations devalue their currencies to spur economic growth and fight deflation.
Her remarks Wednesday prompted money-market traders to push out their expectations for an initial rate increase and to lower bets for how quickly borrowing costs will climb. Futures contracts show a 38 percent likelihood the central bank will raise its benchmark by its September meeting, down from a 55 percent chance seen prior to the Fed’s statement.
“What it means for the dollar is interim weakness,” said Jennifer Vail, head of fixed-income research in Portland, Oregon at U.S. Bank Wealth Management, which manages $126 billion. “The dollar will climb again.”
Hedge funds and other large speculators increased net bullish bets on the U.S. currency’s strength versus eight major peers to 435,439 contracts in the week to March 10, the highest level in a month, according to Commodity Futures Trading Commission data compiled by Bloomberg.
“You hardly ever hear the Fed comment about currency,” said Gary Pzegeo, the Boston-based head of fixed income at Atlantic Trust Group Inc., which manages $27 billion.
“I’m not surprised that they’re paying attention to it and I’m further not surprised that they’re reacting to it because it does have an impact on the inflation outlook and the growth situation.”
© Copyright 2023 Bloomberg News. All rights reserved.