Fed Chair Janet Yellen yesterday reiterated the need to move cautiously with rate increases, citing the uncertainty in the global economic outlook as a risk to the US economy. Speaking at the Economic Club of New York, Yellen said the Fed wanted to get ahead of the developments in the global economy and adjust its policy path accordingly before they start to impact its forecast for unemployment and inflation. She noted that economic and financial conditions remain less favorable than they did back at the time of the December FOMC meeting. Yellen was also less optimistic on inflation, saying inflation expectations “may have drifted down”.
Adding to the note of caution was Dallas Fed President Robert Kaplan who, also speaking on Tuesday, said the Fed should “proceed gradually” in raising rates.
The dollar, which had retraced all of its losses against the yen following the sell-off after the March FOMC meeting, fell back below 113 yen and was down at 112.34 yen in Asian trading today. The euro was also back near the highs last seen in mid-March and stood just above 1.13 dollars on Wednesday. Sterling was another winner as it managed to reclaim the 1.44 level against the greenback despite a fresh warning yesterday by the Bank of England on the risks to UK financial stability from a ‘Brexit’. Against a basket of currencies, the US currency tumbled 1% with the dollar index falling to 94.91.
In other news, Japanese industrial production slumped by 6.2% month-on-month in February, missing estimates of a 6% drop. This was the biggest monthly drop since 2011 when the country was hit by a massive earthquake and raises the possibility of a second straight quarter of GDP contraction in the first three months of the year.
The data had little impact on dollar/yen but the Japanese currency declined against other majors such as the euro and the pound.
Commodity-linked currencies also moved higher on Wednesday as traders readjusted their positions on the US dollar. The aussie moved back above 0.76 versus the greenback to climb to 0.7662 in late Asian trading, while the New Zealand dollar jumped to an 8-month high of 0.6927.
Crude oil prices bounced back from yesterday’s lows following a less-than-expected rise in US crude stockpiles according to the American Petroleum Institute. US oil futures advanced to $38.90 a barrel in late Asian session to stand $1 above Tuesday’s low.
Gold prices benefited from the retreating dollar, which helped the yellow metal surge by 1.7% yesterday to $1242 an ounce.
The rest of the day is likely to be relatively quiet with only German flash inflation and the ADP employment report in the US to keep traders busy. A speech by the Fed’s Evans may also attract some attention.
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