Dollar climbs after Fed's Powell comments

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The dollar rallied from three-month lows on Thursday, extending gains against the euro and yen, after Federal Reserve Chairman Jerome Powell said the U.S. central bank intends to further shrink the balance sheet, suggesting it is not done tightening monetary policy just yet.

The greenback hit session highs against the euro, yen, and Swiss franc following Powell's comments. The Fed chairman also said he sees no near-term risk of a U.S. recession and expects continued momentum in economic data. However, he reiterated that the Fed can be patient on monetary policy and can move "flexibly and quickly" if economic data warrants it.

"Mr. Powell came across as cool and composed and appears to have a glass half-full mentality when it comes to the U.S. economy," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington. "There were hawkish elements to his comments, particularly those on the balance sheet, which means that the Fed will continue to tighten policy. On the surface, that's dollar-positive and risk-negative," he added.

In afternoon trading, the dollar index rose 0.3 percent to 95.535, after earlier dropping to a three-month trough. It has weakened though in four of the last six sessions as traders bet U.S. interest rates will stay steady in 2019.

Minutes from the Federal Reserve's Dec. 18-19 meeting showed several policymakers were in favor of keeping rates steady this year. On Thursday, Fed officials echoed the minutes' cautious stance. St. Louis Fed President James Bullard, a voter on the Federal Open Market Committee this year, said the U.S. central bank's policy stance may be too hawkish and it should listen to market signals and stop raising interest rates.

Charles Evans, president of the Federal Reserve Bank of Chicago, another FOMC voter in 2019, repeated his view on Thursday that the Fed has "good capacity to wait" before delivering what he expects will be three more rate hikes.

Richmond Federal Reserve President Thomas Barkin was also cautious on Thursday, saying his contacts are worried about how long strong U.S. economic growth can continue. The euro, meanwhile, dropped 0.4 percent to $1.1498, while the dollar rose 0.3 percent versus the yen to 108.42 yen

Data out of Europe has been fairly tepid. French industrial production fell more than expected in November while Swedish private-sector production data was fairly flat.

On the trade front, China and the United States extended trade talks in Beijing, boosting oil prices and broader sentiment. Overall, investors remained on a wait-and-see mode, as they awaited resolution of three key issues: U.S.-China trade negotiations, the U.S. government shutdown, and Britain's exit from the European Union.