Dollar Weakens Following Yellen's Comments

The nominee for the next chairman of the Federal Reserve, Janet Yellen, has told the Senate Banking Committee in Washington that it is important that the Fed doesn't withdrawal stimulus too soon. She said, "It’s important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero." The initial response in the markets, as one would have expected, was a broad weakening of the U.S. dollar before a counterintuitive rally in the dollar which caught many traders by surprise.

Although markets were generally appeased by the comments by Yellen, not all the news overnight was good. Developments in Europe suggest that the recovery underway in the euro zone may not be as robust as many had hoped. Gross domestic product in the euro zone rose only 0.1% in the September quarter from a 0.3% expansion in the June quarter. Growth in Germany slowed while France's economy unexpectedly contracted and Italy extended its record long recession. In October, unemployment stood at a record high of 12.2% while inflation slowed to the lowest levels in fours. We expect pressure on the euro to push it back below 1.3000.

U.S. equity markets cheered Janet Yellen's support of continued stimulus for the U.S. economy. Indexes rose to record highs with the S&P 500 gaining 0.47% to 1,790.30. Markets continue to expect tapering of stimulus from a monthly purchase of $85 billion in bonds to $70 billion in March of next year. So far, the S&P 500 has rallied 26% in 2013, and is on track to record its best performance in a decade. Earlier in Europe, bourses recorded strong gains with the EURO STOXX 50 gaining 1.08%.

Commodity prices were supported by the Yellen comments with the major indexes gaining 0.25%. WTI crude was steady at $93.90. Precious metals rallied in response to continued support for stimulus. Gold gained 1.5% to $1,286 while silver rose by a similar margin to $20.80. Copper was steady while agricultural commodities were mixed.