Dollar slips as Fed's Yellen strikes dovish note | MarketWatch | Currencies: -November 14, 2012-

Dollar slips as Fed’s Yellen strikes dovish note

Yen under pressure; euro seen as beneficiary of ‘short squeeze’

By William L. Watts  7:28 am GMT -5

FRANKFURT (MarketWatch)—The dollar lost a little ground versus most rival currencies Wednesday as Federal Reserve Vice Chair Janet Yellen signaled support for holding official U.S. interest rates lower for longer, while the yen slipped as Japan appeared to move closer to an election before the end of the year.

The ICE dollar index , which measures the U.S. unit against a basket of six major rivals, dropped lately to 80.049, down from 81.097 in late North American action on Tuesday.
In a speech late Tuesday, Yellen backed what would be a major change in the central bank’s communication policy, saying the Fed should tie rate hikes to specific levels of unemployment and inflation. See: Fed’s Yellen backs new way to give guidance.
Yellen “sounded even more dovish than current Fed guidance, opining that the optimal trajectory for U.S. monetary policy would hold the policy rate near zero until early 2016,” said Geoffrey Yu, currency strategist at UBS. The Fed’s current guidance is for mid-2015.

Yellen’s seen as a top candidate to replace Fed Chairman Ben Bernanke should he decide to leave his post at the beginning of 2014.
Easier monetary policy tends to be negative for a currency as it points to lower interest rates. The prospect of easier policy can also boost investors’ appetite for risk, undercutting the safe-haven dollar as they pile into other assets.
Meanwhile, the yen weakened against the dollar after Japanese Prime Minister Yoshihiko Noda said he would be willing to dissolve the lower house of parliament on Friday if the main opposition Liberal Democratic Party agreed to certain conditions. See: Japan PM sets conditions to dissolve Diet: reports.
The dollar bought 80.05 Japanese yen in recent action, up from ¥79.49.

‘Unlimited yen’

News reports said Shinzo Abe, leader of the Liberal Democratic Party and seen as the candidate most likely to become the next premier if an election is held in December, called on the Bank of Japan to print “unlimited yen” to achieve a new, unspecified inflation target.
“The expected rise in pressure on the [Bank of Japan] to ease further is the primary reason driving [yen] weakness on election stories,” said Elsa Lignos, strategist at RBC Capital Markets in London.
“But while it works on the day, it should be no surprise that we do not think it will reverse the long-term dollar/yen decline. Our favorite way to play this is still selling dollar/yen call options, to profit from an inability for the cross to sustain rallies,” Lignos said.
Call options give a prospective buyer the right but not the obligation to buy an underlying instrument at a certain price.
Also Wednesday, the euro fetched $1.2737, up from $1.2706 on Tuesday.
Michael Derks, chief strategist at FxPro, said the euro’s ability to rise despite a continued run of “fairly troubling economic news” indicated the shared currency’s in the midst of a classic “short squeeze,” in which traders betting on a further fall by the shared currency are forced to exit positions.
Derks flagged data showing Greece’s gross domestic product plunged by 7.2% on a year-on-year basis for the third quarter, while Portugual’s GDP also tanked. The contractions come as the International Monetary Fund and the European Union continue to squabble over how to achieve debt sustainability in Greece.
“The fact that the euro cannot go down on this combination of bad data implies that the short base was extensive. It is perfectly plausible that not all shorts have yet been flushed out, and that traders may seek to trigger a further witch-hunt in the very near term,” pushing the euro up through remaining stop-loss orders, he said.

Bank of England: open to accommodation?

The British pound bought $1.5868, down from $1.5876.
The Bank of England, in its latest round of quarterly forecasts, indicated inflation is likely to remain above the central bank’s 2% target until the middle of 2014.
The report also scaled down the forecast for economic growth, indicating the 1% quarterly jump in growth generatd in the third quarter is likely to prove unsustainable, noted Annalisa Piazza, economist at Newedge.
The Bank of England’s overall tone was relatively dovish, with Gov. Mervyn King stressing an uncertain outlook for the economy, Piazza said. Overall, the report leaves the door open for further monetary accommodation, she said.
Rounding out the major currency pairs, the Australian dollar changed hands at $1.0431 versus its U.S. counterpart, virtually flat with $1.0432 late Tuesday.