U.S. dollar rises on rate hike expectation

Federal Reserve Chair Janet Yellen on Wednesday pointed to a possible December interest rate “liftoff” but said rates would rise only slowly from then on to nurture the US economic recovery.

Ms Yellen has previously said that rates were likely to rise by the end of this year. There have been a few signs of stability since the summer.

Since the weekly initial jobless claims report was in line with expectations, analysts say that the probability of a rate hike in December is higher than in recent months.

She argues that raising rates sooner rather than later would allow the Fed to gradually raise rates. If the Fed waits too long, it may be forced to raise rates quickly – which may spook stock markets.

The Fed’s benchmark rate has been at record lows since 2008 to stimulate the economy and create jobs. Negative interest rates are not only artificially low, but entirely impossible in unhampered loan markets – although many would love to borrow, nobody would pay for somebody to borrow from them. At their meeting last week, policymakers believed that the threat of global headwinds had ebbed, Yellen said.

Yellen said the Fed has implemented more-stringent requirements to require banks to hold “substantially larger amounts of high-quality capital” and to hold “a buffer of high-quality liquid assets sufficient to meet net liquidity outflows during a period of severe stress”. The next FOMC meeting is on December 15-16, and futures contracts now imply a roughly 56% probability of a December rate hike, up from 34% prior to the Fed statement.

Republicans on the House committee have been critical of numerous regulatory changes the Fed is undertaking to implement the 2010 Dodd-Frank Act.

“There is a strong momentum for the dollar as rate hike chances for December have improved”, said Yujiro Goto, currency strategist at Nomura.

Stock market investors are not excited about a rate hike – the Fed’s near-zero interst rate policy has been a big reason stocks have enjoyed a 6-year bull market upswing.

“Today’s sell-off was easily definable by a few hawkish comments out of [Yellen] suggestive of a rate hike next month”, wrote Jim Ritterbusch, with the oil trading firm Ritterbusch & Associates, in a note.

When Yellen was asked about the outlook for monetary policy on Wednesday, she could have avoided the question.

Investors are also preparing for the release of the government’s monthly jobs report, out Friday.