Dollar bulls were on the defensive on Wednesday after Federal Reserve chair Janet Yellen’s cautious tone left markets wondering if there will be even one hike to US interest rates this year.
In a speech to the Economic Club of New York, Yellen stressed the need to be cautious in raising rates and highlighted external risks, including low oil prices and slower growth abroad.
Her stance was in contrast to some of her colleagues who last week suggested another tightening may be around the corner.
“The communication from global central banks at the moment is causing a bit of consternation for markets in terms of consistent policy signals, or lack thereof,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong.
“But Yellen has spoken, and that's seen a reversal for the U.S. dollar,” she said.
Dollar index
After Yellen spoke, the dollar index slid 0.8 percent in its biggest one-day fall in nearly two weeks. It was slightly lower at 95.135 in Asia, languishing near its session low of 95.071.
The greenback dipped about 0.2 per cent to 112.43 yen after bumping to a nearly one-week session low of 112.39, moving further away from a nearly two-week high of 113.805 touched on Tuesday.
The yen firmed even as dismal data released early in the session heightened speculation that Japan will need to muster more stimulus to avert another recession.
Factory output fell 6.2 per cent last month from the previous month, the biggest tumble since 2011 when the devastating earthquake, tsunami and nuclear crisis disrupted Japan's supply chain.
The greenback also lost ground on the euro, which was last steady at $1.1293, after popping up as high as $1.1303 overnight, within sight of this month's peak of $1.1342 set on March 17.
US Treasury yields
Yellen’s dovish remarks prompted investors to buy US Treasuries on expectations the Fed will take its time hiking rates, and the lower yields undermined demand for the dollar.
The yield on benchmark 10-year Treasury notes stood at 1.810 per cent, in Asia, after skidding to a four-week low of 1.805 per cent in US trade on Tuesday.
Fed fund futures now have barely a quarter-point hike priced in for this year.
“Such a cautious stance suggests a rate hike in April is unlikely, and there are increased doubts that the Fed will be ready to move in June,” said Sean Callow, senior currency strategist at Westpac Bank.
Commodity currencies
Commodity currencies also gained ground with the Australian dollar back above 76 US cents at $0.7624, within sight of an 8-1/2 month peak of $0.7681 set on March 18.
Sterling broke above $1.4400 overnight, pulling further away from a seven-year trough of $1.3836 set on Feb. 29, as the market put aside “Brexit” jitters for now. It was last steady at $1.4374.
With Yellen appearing to put external risks on par with domestic factors in the bank’s policy deliberations, China’s manufacturing survey on Friday could trigger a fresh bout of market volatility. Friday will also bring fresh clues on the strength of the US labour market, with the latest US non-farm payrolls report.