Dollar rebounds as hawkish Yellen prevails

New York

THE US dollar rallied to a two-week high against the yen and Swiss franc last Friday in volatile trading, as investors focused on Federal Reserve chairwoman Janet Yellen's comments on an improving US economy that bolstered the case for an interest rate increase.

The US currency had given up gains soon after Ms Yellen spoke to central bankers, as she gave no indication that a rate hike was imminent. The dollar, however, then rose as traders re-assessed her words and took into account hawkish remarks from Fed vice-chairman Stanley Fischer. Mr Fischer said on CNBC TV that the Fed was still on track to raise rates this year.

"Yellen is a pre-disposed dove. When a pre-disposed dove tells you that the case for a rate hike has strengthened, you respect that, especially if it's coming from the Fed chair," said Mazen Issa, senior FX strategist at TD Securities in New York. "Her comments were reinforced by Fischer. Both Yellen and Fischer generally walk the same path. I think that was the lynchpin that catapulted the dollar."

At a gathering of central bankers from around the world in Jackson Hole, Wyoming, Ms Yellen said improvements in the US labour market and expectations for moderate growth have boosted the case for a rate rise.

Futures markets late on Friday priced in a 36 per cent chance that rates will rise in September, from 24 per cent right after Ms Yellen's comments, according to the CME's FedWatch. For the Fed's December meeting, the probability rose to more than 60 per cent, from 57 per cent in morning trading.

Friday's data on the second estimate of US gross domestic product was put on the backburner following Ms Yellen's statement. That report showed US growth in the second quarter was slightly lower than previously thought, rising at a 1.1 per cent annual rate. That was down slightly from the 1.2 per cent rate reported last month.

There were positive elements in the report, though, such as the upward revisions in consumer spending and an improvement in business investment figures from the preliminary estimate.

In afternoon trading, the dollar index, which measures the greenback versus six major currencies, rose 0.8 per cent at 95.563. Earlier, the index hit a 10-day high.

The dollar rose against the yen to a two-week high of 101.93 yen and was last up 1.3 per cent at 101.88 yen.

Against the Swiss franc, the dollar gained 1.2 per cent to 0.9788 franc, while the euro fell 0.9 per cent to US$1.1180. REUTERS