Dollar Gains Against Euro, Yen After Yellen Reaffirms Fed Plans

By James Ramage 

        The dollar gained against the euro and the yen Wednesday as Federal Reserve Chairwoman Janet Yellen reaffirmed that the central bank remained on a path to raise borrowing costs this year.

        Ms. Yellen mentioned in testimony she gave before the U.S. House Financial Services Committee that low inflation readings reflect transitory factors, and that prices will climb toward the central bank's 2% target as those diminish. She also ascribed sluggishness in the economy over the first three months of 2015 to temporary causes, and noted that energy prices had stabilized while U.S. consumer spending has picked up.

        In response, the dollar rose 0.5% versus the common currency, with one euro buying $1.0948 in late-afternoon trade, putting the U.S. currency on track for its strongest close in six weeks. The dollar increased 0.3% against the yen to Yen123.71, on pace for its highest close in almost three weeks.

        Her comments struck an optimistic tone on the U.S. economy, said Vassili Serebriakov, currency strategist at BNP Paribas, and underscored that markets should expect a rate increase this year. Investors had been pushing back expectations for the first increase in U.S. rates in nine years into 2016 as global risks around Greece and China worsened.

        Higher U.S. interest rates would make the dollar more attractive to yield-hungry investors.

        "The message is the economy appears to be on the right track," Mr. Serebriakov said. "This should give the dollar some support today."

        But investors require clearer signs of recovery and strength in the U.S. economy before they will push the dollar beyond its recent trading ranges with rivals, said Ian Gordon, currency strategist at Bank of America Merrill Lynch.

        "For the dollar to strengthen further, you would need to see the data validate the Fed's view that inflation is moving toward their target and see growth measures increase to validate their view that it's recovering from the slow first quarter and is on pace to rise more dramatically over the rest of the year," Mr. Gordon said.

        Ms. Yellen also discussed global risks in more detail and added that they weren't likely to change her outlook on the U.S. economy or borrowing costs. While she briefly mentioned Greek risks, she highlighted challenges China faces, including those posed by the "high debt, weak property markets, and volatile financial conditions."

        The testimony marks the first of two days of semiannual hearings before lawmakers for Ms. Yellen. She will speak before the Senate Banking Committee on Thursday.

        In other trade, the Canadian dollar shot lower against its U.S. counterpart after the Bank of Canada trimmed its benchmark overnight interest rate by 25 basis points to 0.50%, its second such cut this year. The Canadian dollar retreated 1.6%, as one U.S. dollar bought C$1.2931, the highest in six years.

        The central bank said the deep effect of lower oil prices, a sluggish recovery in non-energy exports and weak business investment presented greater headwinds to growth than it anticipated, leading it to lower its growth outlook to 1.1% for 2015 from the previous forecast of a 1.9% expansion.

        Write to James Ramage at james.ramage@wsj.com

        (END) Dow Jones Newswires

        July 15, 2015 15:17 ET (19:17 GMT)