US Dollar (USD) Loses out as Japanese Yen (JPY) Gains on Vague Yellen Comments

February 11, 2016 - Written by John Cameron

STORY LINK US Dollar (USD) Loses out as Japanese Yen (JPY) Gains on Vague Yellen Comments

Yellen's Statement Drives Foreign Currency Exchange Rate Movement, USD, JPY, GBP, EUR

In the world of global central bankers, there is one central banker who stands first amongst equals; the US Federal Reserve remains the pre-eminent global lender of the last resort and Fed Chair Janet Yellen is the central bank chief who calls the tune which other reserve banks follow. For this reason, Yellen’s Monetary Policy Report to Congress, published yesterday afternoon in the States, was a closely-monitored missive.

Yellen opened her written submission in optimistic form, stating that the US, ‘economy has made further progress toward the Federal Reserve's objective of maximum employment. And while inflation is expected to remain low in the near term, in part because of the further declines in energy prices, the Federal Open Market Committee (FOMC) expects that inflation will rise to its 2 percent objective over the medium term.’

Federal Reserve 2016 Interest Rate Forecasts Impact US Dollar Exchange Rate Demand

However, this go-ahead opening gambit was soon tempered by Yellen’s description of the ongoing domestic threats to the American economy. The Fed Chief went on to warn that, ‘financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset.’

Foreign Exchange Forecast: What Threats Does the US Economy Face?

She wrapped up by expanding on the exogenous threats to the US recovery, observing that, ‘as is always the case, the economic outlook is uncertain. Foreign economic developments, in particular, pose risks to U.S. economic growth. Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China's exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth. These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries. Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further.’

She has since failed to entirely rule out the possibility of negative rate hikes, suggesting that they needed to be researched further in order to ensure the Fed were fully equipped to deal with any developments, which investors are sure to make a big deal of considering the recent surprise move by the Bank of Japan to cut interest rates negative.

Safe-Haven Japanese Yen (JPY) Climbs by nearly 1% VS Pound Sterling (GBP) Exchange Rate

The fall-out saw the US Dollar (currency : USD) weaken as investors pared their Fed interest rate expectations. Meanwhile, the safe haven Japanese Yen (currency : JPY) benefitted from Yellen’s words of warning, gaining almost 1% against the Pound Sterling (currency : GBP).

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TAGS: Daily Currency Updates Dollar Pound Forecasts Japanese Yen Forecasts