Dollar Still Slightly Weak in Wake of Yellen Comments

By Josie Cox 

        Mild weakness in the U.S. dollar persisted Thursday after the market took comments by Federal Reserve Chairwoman Janet Yellen as a fresh reminder that the central bank is in no hurry to raise interest rates.
        In testimony before Congress Wednesday, Ms Yellen said the economy was on track for "solid growth," but she pointed to housing as a potentially more lasting problem
        "The tone of the speech was dovish as expected," said Lee Hardman, an analyst at Bank of Tokyo Mitsubishi UFJ. "The dollar has continued to remain on the defensive," he added, noting that U.S. Treasury yields have also risen, and now stand at 2.625%, though that is also a response to cooling geopolitical tensions. Yields rise as prices fall.
        The euro traded at $1.3926 against the dollar in the run-up to the European Central Bank's policy announcement later in the day. Sterling was at $1.6966, with a Bank of England rate announcement also pending, while the yen traded at Yen101.80.
        The ECB is broadly expected to leave interest rates unchanged, despite persistently drab inflation, but President Mario Draghi's subsequent news conference will be monitored closely for hints of what the June meeting might bring, and in particular whether the central bank may embark on a program of asset purchases to stimulate the economy, a policy known as quantitative easing.
        "We expect the ECB governing council to keep interest rates unchanged at its May monthly policy meeting on Thursday, but it is again a close call, " Barclays strategists wrote in a note. "Business surveys indicate that the euro-area economy has gained further growth momentum over the past month, while disinflationary pressures persist. These conflicting signals complicate the ECB's assessment of medium-term price developments."
        The recent strength of the euro has fanned new fears surrounding inflation, but the prevailing view is for action to come in June at the earliest.
        "June seems more likely, but the ECB is not finding it easy to agree on a QE program and may need longer still. It's been a case of lots of words but little action so far," said Ben Bennett, credit strategist at Legal & General Investment Management.
        The Bank of England is also expected to keep rates on hold.
        "The fact that unemployment breached the 7.0% threshold--falling to 6.9% in February--potentially makes this the most interesting meeting for some time," HSBC strategists wrote in a note. "However, low inflation and wage growth means that a change in policy at this stage is still very unlikely."
        The Russian ruble was trading at 35.05 against the dollar and retaining the gains it made Wednesday, after President Vladimir Putin sounded a more conciliatory tone over the Ukraine crisis. The Russian president appealed to pro-Russian separatists in southeastern Ukraine to delay a referendum on independence planned for this weekend.
        Moscow's MICEX stock index closed 3.4% higher on Wednesday and was trading around 1% higher on Thursday.
        The Stoxx Europe 600, meanwhile, was up 0.3% in early trade, with the U.K.'s FTSE 100 up 0.2%, led by Barclays. Investors cheered the U.K. lender's decision to cut 7,000 jobs at its investment bank over the next two years--part of a wider plan to reduce its bloated cost base.
        France's CAC-40 also rose 0.2% and Germany's DAX added 0.3%, seemingly unperturbed by disappointing German economic data.
        Figures Thursday showed that manufacturing in Europe's largest economy fell sharply on the month in March. New orders fell 2.8% in adjusted terms, data from the country's statistics office showed Wednesday. Economists surveyed by The Wall Street Journal had expected a rise of 0.2%. The statistics office raised its reading of February's growth in new orders to 0.9% from the 0.6% initially reported.
        In commodities markets, gold rose 0.2% to $1,291.50 an ounce while Brent crude oil lost 0.15% to trade at $107.98 a barrel.
        Write to Josie Cox at josie.cox@wsj.com
        (END) Dow Jones Newswires

        May 08, 2014 04:14 ET (08:14 GMT)