US Dollar Steadies as Fed Chair Janet Yellen Supports Raising Interest Rates

The US dollar recovered all of the losses it made earlier on Thursday following the testimony of Federal Reserve Chair Janet Yellen in front of Congress, in which she said that increasing interest rates soon is appropriate and should place the US economy on the right track.

Yellen spoke to Congress’s Joint Economic Committee at 15:00 GMT today. In her remarks she said that the moderate growth seen in the world’s largest economy should help it achieve full employment, while also pushing inflation closer to the Federal Reserve’s target at 2%.

I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the Committee’s 2 percent objective over the next couple of years

Yellen did not mention a date for the next interest rate hike, which she said the central bank should not wait too long before taking to keep recession risks within control, instead she chose to say that the increase should be expected relatively soon.

Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee’s longer-run policy goals. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.

However, investors remained certain that the Federal Open Market Committee will decide to raise rates in its meeting on December 14, according to data collected from futures prices by the CME Group. The group’s FedWatch tool shows a 90.6% probability of increasing rates next month.

The US currency initially declined today as traders anticipated Yellen’s testimony. However, it quickly gained support from her comments and a report released at 13:30 GMT by the Bureau of Labor Statistics. The report’s data showed that the Consumer Price Index rose by 0.4% in October from 0.3% in September, after taking seasonal variables into account. The report also said that the CPI gained 1.6% on a year-to-date basis without seasonal adjustments.

EUR/USD touched 1.0630 as of 17:53 GMT, the pair’s lowest level for the day, after rising to 1.0741 at 12:20 GMT. EUR/USD opened trading today at 1.0691.

The Dollar Index, which tracks the performance of the US dollar against a basket of major currencies, rose to 100.6 at 17:39 GMT from 100.4 on Wednesday.

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