US dollar supported by Yellen's rate hike talk, politics saps euro

[TOKYO] The US dollar was underpinned by remarks from the Federal Reserve chief on the need to continue with rate hikes, while the euro licked the wounds from political uncertainty following the German election at weekend.

The US dollar's index against a basket of six major currencies stood at 93.07 in early Wednesday trade after it reached a high of 93.286 the previous day, its highest level in almost a month.

Fed Chair Janet Yellen said on Tuesday that the Federal Reserve needs to continue gradual rate hikes despite broad uncertainty about the path of inflation.

It would be "would be imprudent to keep monetary policy on hold until inflation is back to 2 per cent," she said.

"Her comments suggest that latest (soft) inflation readings do not have a big bearing on the Fed's monetary policy. The Fed's focus is not to delay rate hikes too much to avoid a situation where it needs to raise rates hastily in the future," said Yukio Ishizuki, senior strategist at Daiwa Securities.

US interest rate futures price dipped further to price in about 70 per cent chance of a rate hike by December compared to near 60 per cent on Monday.

Against the yen the dollar stood at 112.27 yen, bouncing back from Tuesday's low of 111.50.

The euro slipped to a five-week low of US$1.17575 on Tuesday and last stood at US$1.1790. The euro weakened against other currencies, hitting a 10-week low of 0.87545 British pound and two-week low of 1.14075 Swiss franc.

The common currency had rallied more than 10 per cent so far this year on as worries about the rise of anti-establishment political forces in Europe faded while expectations rose for tapering the European Central Bank's stimulus.

But the rise of a far-right party and the decline of traditional parties in Sunday's German election has left Chancellor Angela Merkel struggling to form a coalition government, denting investor sentiment.

Elsewhere, the Australian dollar slipped a tad to US$0.7874 after having dropped to six-week low of US$0.7860 on Tuesday.

The Aussie was undermined by a fall this month in the price of iron ore, its main export product.

The biggest focus for the market for Wednesday is the announcement of a tax plan by the US administration and Republicans in Congress.

The plan has been developed over several months by six White House and congressional Republicans working behind closed doors. President Donald Trump told US lawmakers on Tuesday he wants bipartisan cooperation on tax reform.

REUTERS