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EUR/USD gains as Yellen comments spark dollar selloff

Published 03/31/2014, 12:46 PM
Updated 03/31/2014, 12:47 PM

Investing.com - The dollar slumped against the euro on Monday after Federal Reserve Chair Janet Yellen said earlier that policy will remain loose for some time to come, which sent investors ditching the greenback.

In U.S. trading, EUR/USD was up 0.22% at 1.3782, up from a session low of 1.3724 and off a high of 1.3807.

The pair was likely to find support at 1.3705, Friday's low, and resistance at 1.3876, the high from March 24.

In her first major speech as Fed Chair, Yellen told the National Interagency Community Reinvestment Conference in Chicago, Illinois, that the U.S. economy still needs monetary support to ensure more sustained recovery.

"I believe it is appropriate for the Federal Reserve to continue to provide substantial help to the labor market, without adding to the risks of inflation, is because of the evidence I see that there remains considerable slack in the economy and the labor market," Yellen said in prepared remarks of her speech.

The Fed is currently purchasing $55 billion in bonds a month to spur recovery, a monetary policy tool known as quantitative easing that suppresses interest rates to prop up the economy, weakening the dollar as a side effect.

Yellen's words sent investors reevaluating the pace at which the U.S. central bank will taper its bond-buying program let alone begin hiking benchmark interest rates.

"I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed," Yellen said

Elsewhere, data revealed that manufacturing activity in the Chicago region expanded at a slower rate than forecast in March, as new orders fell.

The Chicago purchasing managers’ index fell 55.9 from 59.8 in February. Analysts had expected the index to tick down to 59.0.

Meanwhile in Europe, the euro zone's consumer price index slowed to 0.5% this month from 0.7% in February, undershooting expectations for a reading of 0.6%. The European Central Bank targets an inflation rate of just under 2%, and March's figure was the lowest since November of 2009.

The report showed that core inflation rose 0.8% in March, in line with forecasts, but down from 1.0% in February.

While inflation rates missed consensus forecasts, expectations for the European Central Bank to loosen policy sooner or later have been priced into trading by many investors, which gave the single currency room to shrug off soft consumer inflation numbers.

Separate expectations that the ECB will still remain in a wait-and-see mode at a policy meeting on Thursday due to sentiments that prices are soft but not deflationary supported the euro as well.

The euro was down against the pound, with EUR/GBP down 0.02% to 0.8262, and up against the yen, with EUR/JPY up 0.42% at 142.00.

On Tuesday, the euro zone is to release data on the unemployment rate. Germany is release data on the change in the number of people unemployed, while Spain and Italy are to release reports on manufacturing activity.

In the U.S. the Institute of Supply Management is to publish a report on U.S. manufacturing growth.

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