Dollar slides on Fed taper uncertainty, Yellen
The dollar fell on Wednesday, weighed down by comments from Federal Reserve officials this week about the need to keep the U.S. central bank's economic stimulus in place, and on caution ahead of a Senate confirmation hearing on Thursday at which Fed Chair nominee Janet Yellen is expected to speak.
The euro, however, stayed resilient, rising even although European Central Bank Executive Board member Peter Praet said the ECB could start buying assets or cut its deposit rate into negative territory to trigger a rise in inflation to the central bank's target.
In the United States, there is a growing sense that a reduction in the Fed's stimulus may not be in the cards in the near term. Atlanta Fed President Dennis Lockhart, seen as a centrist in policy terms, and Minneapolis Fed President Narayana Kocherlakota both suggested on Tuesday that the current state of the U.S. economy still warrants aggressive monetary policy action. Their comments pressured the dollar.
Added to that was the uncertainty surrounding Yellen on Thursday. Most investors expect Yellen to be dovish and continue the policies of current Fed Chairman Ben Bernanke.
"There's not a lot of conviction in the market's moves today," said Vassili Serebriakov, currency strategist at BNP Paribas in New York. "I am really surprised about the euro's strength despite Praet's comments and this just goes to show you going into the holiday season investors are not willing to push the euro lower."
In the case of the dollar's weakness, Serebriakov said there are several factors, including concerns of what Yellen could say and mixed messages from Fed officials about tapering.
In afternoon trading, the dollar index dipped, led by gains in the euro, which rose slightly to $1.35.
The euro briefly inched lower after the ECB's Praet was quoted as saying in the Wall Street Journal that "the balance-sheet capacity of the central bank can also be used (to fulfil the inflation mandate)," including outright asset purchases.
Praet also said the ECB still had room to move on interest rates even after cutting the main rate to a record low of 0.25 percent last week and keeping the deposit rate at zero.
"A good amount of the bounce (in the dollar) came out on the news" from Europe, said Andrew Dilz, foreign currency trader at Tempus Inc in Washington, "If we get to a close of $1.3380, then there is more room for dollar strength."