Hawkish Yellen Lifts Dollar
Janet Yellen’s voice might be softer than her predecessor’s but she carries a big stick and pres5rnnted a pro dollar stance in her first press conference that caught equity markets by surprise and lifted the dollar against all major currencies. The new Fed Chair dissected a few of Bernanke’s milestones and added some new criteria for analysts and the public to consider as indicators of Fed policy in the future.
Combined with some easing in the Ukraine, the stronger dollar fared well against the euro, the GBP and yen and soared against the weaker CAD. Easing of the Ukrainian crisis is based on statements by Russia’s Putin that he would contain his invasion to Crimea even as Russian soldiers stormed Crimean outposts.
The European Union and the US have been measured in their response to Putin’s aggression, a strategy that has been hailed by Russians but questioned by the rest of the world. The atmosphere can only be described as Cold War tension with Russia once again playing the aggressor’s role.
Under Bernanke, the Federal Reserve committed to scaling down and ending the stimulus package that has added more than $3 trillion in debt to the Fed’s books. The cutoff was to be when unemployment lowered to 6.5 percent. Bernanke did not anticipate that so many workers would leave the workforce and play a major role in reducing the rate so while the rate has lowered, new job creation has not been strong enough.
Bernanke’s Fed was also committed to historically low interest rates until the inflation rate approached 2 percent. Yellen made it clear that her Federal Reserve is likely to keep interest rates low even after the inflation rate reaches the 2 percent mark and beyond. Investors were surprised that Yellen projected a rate increase as early as 2015 and that rates would remain low well after unemployment fell below the 6.5 percent mark.
In a continuation of Bernanke’s tapering agenda, Yellen confirmed the government would reduce its bond purchase program by another $10 billion per month to $55 billion. Of the 18 Fred board members, only Minneapolis Fed President, Narayano Kocherlakota, dissented.
The Fed also suggested that unemployment would shrink to between 5.9 percent and 5.6 percent by the end of 2015. Yellen attributed disappointing economic data to weather-related issues and said she expected the setbacks to be short-term.
Forex Markets Respond
The USD responded favorably to the news even as equities turned down from what was fairly predictable news.
Against the yen, the dollar gained more than 1 percent and 0.89 percent against a basket of currencies. Against British sterling, the dollar finally gained some momentum, despite good employment data and personal income improvements.
The Canadian dollar slumped to a 4.5 year low against the USD. Yellen’s strong support for the dollar and the Royal Bank of Canada’s weak support for the Loonie sent the CAD plummeting.
Analysts projected the Loonie’s decline will continue, likely touch $0.85 against the USD by June.
- Euro – USD – 1.3821, down 0.07 percent
- GBP – USD – 1.6533, down 0.05 percent
- USD – Yen – 102.43, up 0.13 percent
- USD – CAD – 1.1246, up 0.08 percent
- AUD – USD – .90290, up 0.13 percent
- USD – Ruble – 36.1727