Dollar Falls on Weak Economic Front; Yuan Drops to 10-month Low

Edited by Vani Rao

Yellen indicates that monetary policy remains unchanged

The US dollar weakened against most major currencies on Thursday, 27 February 2014, after Federal Reserve Chair Janet Yellen told that monetary authorities were concerned over soft economic indicators although the Fed’s monetary policy remains on its preset course for now.

Recent manufacturing, jobs, and other economic indicators have disappointed markets, leaving investors unclear if the US recovery has hit a soft patch or if a string of winter storms has slackened the pace of the economic recovery temporarily.

Speaking before the Senate Banking Committee on 27 February 2014, Yellen told lawmakers that it was hard to say how much the recent soft data was due to the rough winter weather. She added that the Fed would remain attentive to signals on whether the recovery is progressing in line with expectations.

Her comments softened the US dollar by clouding expectations as to how slowly the Fed will taper its monthly bond-buying program, which weakens the greenback by suppressing long-term interest rates to spur recovery.

The US dollar was also impacted by the weekly data that revealed the number of individuals filing for unemployment assistance in the US last week. The US Department of Labor announced that the number of people filing for initial jobless claims rose to 348,000 from the previous week’s total of 334,000.

Meanwhile, the GBP firmed up against the dollar on Thursday after Yellen told US legislators that the central bank is likely to maintain its strategy of gradually trimming asset repurchases. Moreover, the disappointing weekly jobless claims numbers softened the greenback as well.

In US trading on Thursday, the GBP/USD settled at 1.6688, up from a session low of 1.6617 and off a high of 1.6698, as shown below.

Source Bloomberg
Source Bloomberg

The GBP was likely to find support at 1.6584, Monday’s low, and resistance at 1.6727, Tuesday’s high.

In a parallel development, the Euro rose against the US dollar on Thursday after the recent comments from Janet Yallen on the weak economic indicators and lacklustre weekly jobless claims data.

Source: Bloomberg
Source: Bloomberg

In US trading, the EUR/USD settled at 1.3710, up from a session low of 1.3643 and off a high of 1.3716. The pair was likely to find support at 1.3643, the session low, and resistance at 1.3773, Monday’s high.

The USD/JPY slid to ¥101.66 from ¥102.17 late Thursday, after Japanese government data released on Friday morning showed that the jobless rate held steady at 3.7%, while factory output in January climbed 4% from the previous month.

Source: Bloomberg
Source: Bloomberg

Meanwhile, the core consumer price index rose 1.3% last month from a year earlier. It marked the eighth straight month of gains for the core Consumer Price Index (CPI), indicating that the economy may be close to winning its decade-long fight with deflation.

Yuan drops sharply

The Chinese Yuan fell to a 10-month low against the US dollar, raising speculation that the central bank is continuing to push down the currency to curb speculation on the Yuan’s appreciation and prevent further inflows of hot money.

The Yuan dropped 0.9% versus the greenback with The Wall Street Journal saying it was the sharpest decline since the Yuan began its managed float in 2005, as the dollar moved as high as 6.1808 Yuan.

The People’s Bank of China fixed the midpoint for Yuan’s trading at 6.1224 Yuan per dollar. Under China’s current forex rules, the Yuan is only allowed to trade within a 1% band on either side of the midpoint set by the central bank.

The currency has been declining for the past two weeks, as markets suspect the central bank is engineering the fall to ward off speculators and prepare for an upcoming reform of its forex-rate policy with increased two-way volatility.

The ICE dollar index, a measure of the greenback’s strength against six other currencies, slipped to 80.276 from 80.291 late Thursday.

On Friday, the US is expected to release revised data on fourth-quarter growth, a report on manufacturing activity in the Chicago region, revised data on consumer sentiment and private-sector data on pending home sales.

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