Yellen Dashed Any Hope For Dollar Recovery

The Fed Governor, Janet Yellen, speech in IMF yesterday effectively erased any hope for sooner Fed rate hike. Rather than worrying about the risk of asset bubbles that might emerge from historically low rate, she is more concerned about preserving financial stability through stronger regulation.

Janet Yellen

US Economy Over Financial Stability

Yellen stated that, "Monetary policy faces significant limitations as a tool to promote financial stability. Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach". Further, she said that she didn't see the need for monetary policy to "deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns". She explicitly refused to risk diminished macroeconomic performance for the sake of financial stability.

The statements mean that the Fed might prioritize macroprudential approach in the next policies. Macroprudential approach became popular following 2008 crisis, characterized by emphasizes in financial regulation to mitigate systemic risk in the financial system. The approach commonly includes multiagency supervision on financial system and tighter observation of capital and liquidity in banking system.

That does not necessarily mean Yellen has completely discarded the idea of rate hike in case of asset bubble, but it is certainly mean that rate hike is off the table for now. At least, until financial stability fall under significant danger, or stronger US economic recovery is publicly recognized by the Fed.

Low Rate, Low Dollar

The US Dollar largely ignores Yellen speech, and stayed in the established trading ranges against major currencies. Meanwhile, ADP Employment Report noted significant improvement in June, and raising hopes that Non Farm Payroll data will record more than 200k in the same period. However, there are doubts whether NFP could boost market interest on US Dollar. US Dollar most probably will stay low key in the near future.

The Fed dovish views has markedly hurt the US Dollar this year. At the end of last year, analyst have remained optimistic that the currency will turn much more powerful following the Fed tapering. However, the central bank idea of policy normalization is received badly by market players. 10-year US Treasury bond yields repeatedly fell below 2.5%, and stock index has continuously rise to new highs.(seputarforex)