Yen tumbles as dollar benefits from Yellen’s rate views

The Japanese yen was the main loser of Thursday’s session as stability in global risk assets caused some profit-taking in the safe haven currency.
Dollar / yen rallied especially strongly as Fed Chair Janet Yellen expressed views that were more in line with what the hawks in the Federal Reserve were saying recently. Specifically Yellen said that a delay in raising rates could have negative consequences for inflation and / or financial stability and that she saw a steady pace of higher rates in the years to come. The US economy was near full employment according to Yellen, but the growing divergences between the US and global rates could push the dollar higher. Yellen and the Fed were also keeping a close eye on the new administration’s economic policies.

Dollar / yen was last near the 115 handle at 114.90; a big move from the previous day’s 112.57 low. The yen also lost ground against the other majors as euro / yen gained to 122.21 and pound / yen rallied to 141.18. Dollar strength was not as obvious against other currencies during the Asian session, as euro / dollar was around 1.0645 with only modest losses and pound / dollar held the 1.2250 level to trade at 1.2295.

The Australian dollar was also a victim of Yellen’s comments initially, but Australian dollar / US dollar managed to recover some of those losses during late Asian session trading. The pair dipped below 0.75 to 0.7492 earlier, but it managed to recover to 0.7532. Australian employment numbers for December were mixed, with stronger-than-expected employment gains and a rise in the participation rate, countered by a higher-than-expected unemployment rate at 5.8%.

In other news, the Bank of Canada kept interest rates at 0.5% on Wednesday. The reasoning for continuing low rates was uncertainty in the US as well as the global economy and persistent slack in the Canadian economy. The Bank of Canada Governor expressed willingness to go as far as further cutting interest rates in the event the Canadian economy is taken off track by US protectionist measures. As a result the Canadian dollar lost significant ground versus its US counterpart as USDCAD rose to 1.3273 from around 1.3050 before the BoC announcement and Poloz press conference.

Looking ahead, the European Central Bank’s meeting and press conference by its President Mario Draghi, could cause some volatility for the euro. The event is not as highly anticipated however as previous ECB meetings, since the decisions on what to do during the coming months have already been taken. The hearings for the confirmation of the new US Treasury Secretary will also be eagerly awaited for any comments about the new administration’s policy towards the dollar. In terms of data, weekly jobless claims in the US, the Philly Fed index, housing starts and crude oil inventories could also be interesting.