Dollar gains as Fed’s Yellen, PPI bolster rate hike expectations

The Federal Reserve chair told Congress that the Fed remains poised to raise interest rates this year, as labour markets were steadily improving, while turmoil in Greece or Chinese equity markets was unlikely to knock the U.S. economy off track.

Sen. Sherrod Brown (D-Ohio), the top Democrat on the panel, also pressed Yellen on the risks of raising rates too soon.

At her testimony to the Senate and in a speech last Friday, Fed chairwoman Janet Yellen affirmed that a rate hike later this year will be appropriate if the economy develops as expected. But Yellen’s conviction that rates will be raised in 2015 – confirmed later by Cleveland Fed President Loretta Mester – caused today’s shallow gains to yield to selling pressure just above Tuesday’s high in the Dow Jones Industrial Average.

The United States central bank has kept markets on edge for a raise in the federal funds rate, which has been locked extraordinarily at zero since the end of 2008 to pull the economy back from the Great Recession.

“In the session ahead, we have another day of testimony from Yellen – this time in front of the Senate – but she is unlikely to change her tune or wade into deeper waters after her first day”, John Kicklighter, chief currency strategist at broker FXCM. She said the Fed holds press conferences after four of its eight meetings each year and updates its economic forecasts more frequently.

Remember that Yellen previous year ditched the 6.5 percent unemployment rate threshold that was established by her predecessor. Yellen said the rate hikes could begin this year.

Since early a year ago, the first rate increase was flagged for around mid-2015.

However, Ms Yellen acknowledged increasing overseas risks.

“Looking forward, prospects are favorable for further improvement in the USA labor market and the economy more broadly”, she told the committee.

In the most heated exchanges, Republican committee members questioned Yellen about the Fed’s refusal to comply with a subpoena for documents relating to a 2012 leak of confidential policy deliberations.

“This leads us to conclude that most of gold’s declines based on a rate rise have already occurred, and that gold’s reaction to the rate hike – whenever it comes – and subsequent hikes, may be muted or short-lived”, Steel said in a note.

“I would push back against the notion that we’re unduly affected by the ups and downs of the stock market”, she said.

Sales at retail stores also fell in June, suggesting consumers are still cautious about spending, limiting demand for factory goods.

Duffy later added: “If anyone is trying to sweep this under the rug, it’s the Fed”.