Yellen turns the dollar

Fed Chair Yellen yesterday unwound most of the dollar rally seen since mid-March, with her surprisingly dovish speech placing a greater note of caution on the outlook for interest rates in the US. This pushed the US 2 year yield back down to levels prevailing at the beginning of the month and the broader dollar index is now down more than 3% on the month and just over 5% for the year. Recall that this was the year that the Fed was expected to continue its tightening path, started in December, giving further support to the dollar. Once again, the roadmap for the year has had to be ripped up and the dollar bulls have had to re-think their strategy. It’s against the yen that the dollar has lost most ground on the majors, but has slipped even more against the Brazilian real, which finds itself nearly 9% higher on the quarter. The more recent gains have come on the back of expectations that President Rousseff will lose power in the coming months and a change of leadership will allow some progress to be made on financial reform.

For today, we enter the penultimate day of the month and quarter, which could lead to some choppy trading as investors wait for the US Employment report on Friday. Ahead of that, we have the ADP numbers at 12:15 GMT today, which will give some steer ahead of Friday’s release. Note that Yellen was also playing down the inflationary significance of the falling unemployment rate yesterday, so even this bright spot is not seen pushing the need for higher rates in the US. We also have business and consumer confidence data in the Eurozone at 09:00 GMT. The euro continues to hold up relatively well against the backdrop of negative rates in the Eurozone, but resistance remains strong around the 1.1342/76 area on EURUSD.

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