US dollar slides as Fed rate hike expectations fade after Yellen

Further interest rate increases this year by the Federal Reserve are looking increasingly unlikely following Fed Chair Janet Yellen’s testimony to the US Congress on Wednesday. She acknowledged that global market turbulence could set back US growth if it persisted.

In her testimony Ms Yellen refused to rule out further tightening, saying decisions would “depend on what incoming data tell us about the economic outlook”.

But the US dollar eased 0.2 per cent on Wednesday, its 11th decline in the past 13 sessions after Yellen’s testimony. In Asia this morning, the dollar index – a measure of the US currency versus a basket of global peers – was a further 0.2 per cent lower at 95.697.

The slide in the dollar continues to underpin recent gains for the euro, yen and gold. The greenback was weaker against all Asian currencies in mid-morning trade.

The greenback’s long bull run has been fuelled by expectations of higher interest rates, but seems to have lost steam with a second rate rise now highly improbable. Until there is greater clarity on the ability of US growth to weather a weak external backdrop, the risk for further dollar capitulation remains.

Meanwhile, a depreciating dollar and reduced expectations of further rate rises will be welcomed by developing countries, many of which have dollar-denominated debts. With the dollar on the back foot, emerging market currencies continued to strengthen, and the EM rally showed no signs of abating after Ms Yellen’s speech.

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