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Sydney - Dollar bulls are looking to Janet Yellen for salvation. They may be disappointed.
The greenback has dropped against 13 of 16 major counterparts this month as traders pared to 30% the odds of a Federal Reserve interest-rate increase this year.
Analysts have started to examine the prospect of the US following the euro area and Japan in adopting rates below zero if the economy deteriorates. The Fed chair in testimony before Congress on Wednesday should “deflate” some of the enthusiasm around negative rates and that may boost US yields and support the dollar, according to Citigroup.
“Her hope would be to unwind some of the bearishness that has engulfed asset markets, and this would be supportive for US dollar, rates and equities,” Steven Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy, wrote in a note. “However, at times market pessimism is so deep seated that good news is viewed only as an opportunity to sell at better levels.”
The dollar dropped 0.3% to ¥114.76 as of 08:58 after falling to ¥114.21 on Tuesday, the weakest level since November 2014. It was little changed at $1.1289 per euro, after reaching a three-month low of $1.1338 on Tuesday. The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was little changed at 1 220.21 and has lost 2.5% since January 29.
Fortunes reversed
The greenback, the darling of currency investors last year, has been caught up in the turmoil sweeping across financial markets. Investors are questioning whether the Fed can continue on a policy tightening path with the Chinese economy slowing and central banks in Europe and Japan using negative rates to boost activity and inflation.
Two weeks after officials signaled borrowing costs may rise more slowly than previously expected, markets will be trying to gauge Yellen’s readiness to delay tightening at the March meeting.
After saying the Fed is closely monitoring global economic and financial developments before hiking, “Yellen can’t really be any more hawkish than to perhaps say every meeting is live for policy change,” said Sean Callow, a foreign-exchange strategist in Sydney at Westpac Banking.
“The market’s current mood is sufficiently downbeat and Yellen’s language likely to be sufficiently hedged that there won’t be a steep rally in US dollar.”
The Fed chief is scheduled to appear before the House Financial Services Committee on Wednesday and will address the Senate Banking Committee on Thursday.
