The dollar index climbed to 90.744, with Powell’s optimism on the economy in his first public testimony as Fed chair suggesting the USA central bank is going to raise interest rates one more time than the three hikes markets had expected.
Dealers said the forex market sentiment turned highly fragile after Powell gave a bullish assessment of the U.S. economy during his first testimony before the Congress, fanning fear of a faster pace of interest rate hikes.
U.S. economic growth slowed slightly more than initially thought in the fourth quarter, after the strongest pace of consumer spending in three years depleted inventories and drew in imports as businesses struggled to produce enough goods and services. He said that the Fed expected inflation to move up this year and then stabilize around the Fed’s 2 percent target.
We saw that with South Korea and more recently, Malaysia. It remains below 2%, the level the Fed considers healthy for the economy. When bonds are paying more in interest, they can lure income investors away from dividend-paying stocks.
Jerome Powell, President Donald Trump’s nominee for chairman of the Federal Reserve, sits in the audience November 28 before being called to testify during a Senate Banking, Housing, and Urban Affairs Committee confirmation hearing on Capitol Hill in Washington.
USA 10-year yields retreated after rising on Tuesday toward four-year highs though the dollar hovered near three week peaks and is set for a monthly rise against a basket of currencies after three months of declines. “The balance of risks is shifting for the Fed”.
Prices for the benchmark 10-year Treasury note eked higher, lowering yields to 2.86% from Wednesday’s 2.87%.
Headwinds also could come from the dollar, which is set for a monthly rise against a basket of currencies following three months of declines and which touched three-week peaks after Powell’s comments.
His appearance comes after the House testimony on Tuesday, when he spurred hopes for a faster pace of rate hikes in the wake of strong economic outlook.
Much of the questioning on Tuesday amounted to a review of where the Fed stands on financial regulation.
Euro zone bond yields held near recent lows as inflation in the bloc slowed, potentially complicating the European Central Bank’s plan to remove stimulus and move towards raising rates.
But Powell said he still expects “gradual” hikes.
The job market is tight, but Powell isn’t anxious that wages are rising too quickly, which can lead to inflation. Palladium and platinum both hit two-month lows, extending losses that began earlier this week when a German court ruled that cities can ban the most heavily polluting diesel cars from their streets.
Fed officials have been patiently waiting for paychecks to grow.
“Our part of it is to take seriously our obligation to achieve maximum employment”.
“I am committed to clearly explaining what we are doing and why we are doing it”, Powell said.
That report acknowledged “valuation pressures” in parts of the economy, and noted the recent return of volatility in stock markets.
“After yesterday, the market is contemplating that we will probably get four rate hikes this year and you have seen the reaction in equities and Treasuries”, said Peter Garnry, head of global equities at Saxo Bank in Stockholm.