Yellen sends greenback to worst month since 2011 as yen advances

[TOKYO] The US dollar headed for its worst month in five years after Federal Reserve Chair Janet Yellen doused speculation the US central bank would pick up the pace of interest-rate increases. The yen strengthened.

A gauge of the greenback approached the lowest since June after Ms Yellen said the Fed would act "cautiously" as it looks to raise rates against a backdrop of deteriorating global economic growth.

During the past two days, the index lost almost all of the gains made last week, when policy makers including St Louis Fed President James Bullard and San Francisco Fed President John Williams said an increase as soon as next month was possible. The US dollar has dropped against all its 16 major counterparts in March.

"The Yellen effect was quite strong" in weakening the US dollar, said Philip Wee, a senior currency economist at DBS Group Holdings Ltd in Singapore. "She's emphasizing patience."

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 major peers, fell less than 0.1 per cent on Wednesday of 6:51 am in London, after declining 0.8 per cent the day before. The gauge has slumped 3.5 per cent in March, set for the worst month since April 2011.

The dollar slid 0.4 per cent to 112.30 yen after dropping 0.7 per cent on Tuesday. The US currency was little changed at US$1.1295 per euro. The yen rose 0.3 per cent to 126.84 per euro.

Trouble Abroad

Global developments, particularly those in China, pose ongoing risks to the Fed's outlook, Ms Yellen said in a speech to the Economic Club of New York on Tuesday. Appreciation by the US dollar is still expected to weigh on inflation in months to come, she said.

Traders slashed the likelihood of a rate increase in April to zero, down from 6 per cent on Monday, and lowered the probability of one in June to 28 per cent from 38 per cent, based on the assumption that the effective fed funds rate will trade at the middle of the new Fed's target range after the next increase.

"Yellen indicated that core Fed members take into account the global context more than regional officials," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp in New York.

"A June rate hike would be difficult as global financial turmoil earlier this year affects the real economy with a time lag."

Commonwealth Bank of Australia, the country's largest lender, has revised down its forecasts for the greenback, while raising those for the Australian and New Zealand dollars, the euro and the yen.

"The actual US dollar decline has been more dramatic than we expected," currency strategists led by Richard Grace at Commonwealth Bank in Sydney, wrote in a note to clients.

"We have subsequently revised lower the extent to which we believe the Fed will lift interest rates both in the short-term and in the long-term."

BLOOMBERG