Yuan slides, dollar jumps as investors await rate rise clues from Fed Chair Yellen

US dollar index jumped to its highest level since January 13 after a lack of policy detail in Trump’s Congressional address sharpened focus on Yellen

PUBLISHED : Wednesday, 01 March, 2017, 11:57am
UPDATED : Wednesday, 01 March, 2017, 5:55pm

The Chinese yuan weakened on Wednesday as the US dollar surged to a more than one-month high in the afternoon.

Investors shifted their focus towards Federal Reserve Chair Janet Yellen’s speech on Friday, which may provide signals of an interest rate rise in March. They will be listening to her words even more keenly after President Donald Trump failed to provide any meaningful details about his budget plans during his highly anticipated first address to Congress.

Onshore yuan closed at 6.8800 against the US dollar, 0.2 per cent or 110 points weaker. Offshore yuan dropped 131 points, or 0.2 per cent, to 6.8686 per US dollar.

The People’s Bank of China set the yuan’s reference rate at 6.8798 on Wednesday, 48 points below its level on Tuesday.

The DXY, the USddollar index that tracks its value against a basket of six rival currencies, at one stage surged to 101.79, the strongest level since January 13, as traders switched their attention to the rising possibility of an interest rate rise this month.

“Trump’s speech didn’t really say anything new about his policies. That is disappointing, but is also expected,” said Mark Wan, chief analyst at Hang Seng Investment Services.

“Attention will now turn to Fed Chair Yellen’s speech on Friday which should have more impact if she is hawkish,” said Jeffrey Halley, senior market analyst at OANDA. “Over the last 10 days, a plethora of other governors have been upbeat and hawkish, and a follow-on by Mrs Yellen would put March’s FOMC unexpectedly ‘live.’

“This would almost certainly lead to another bout of US dollar strength.”

Yellen’s speech and the trajectory of US interest rates seem likely to have a far greater effect on the offshore yuan and emerging market currencies in general than President Trump for now, Halley added.

Three Fed officials stole Trump’s thunder overnight when they sent out hawkish comments on the likelihood of an interest rate rise.

New York Fed president William Dudley said an increase is in the “relatively near future” in an interview with CNN International, before Trump started his speech.

His comments echoed those of Dallas Fed President Robert Kaplan, who on the same day told CNBC the central bank should move “sooner rather than later” to raise the rate.

And San Francisco Fed President John Williams said a rate rise “is on the table for serious consideration” at the Fed’s policy meeting in mid-March.

“Dudley is the newcomer to the group of would be hikers – he not only joined the chorus but proclaimed that ‘the risks to the outlook are now starting to tilt to upside.’ That’s strong stuff

for Dudley,” analysts at DBS wrote in a note.

“All things considered, we continue to put a subjective 60 per cent odds on a March move, as we have for many months.”

Wan said Trump’s policy changes are unlikely to have any effect on the US economy until next year, as it will take months for him to get his proposals approved by Congress.

“As a result, the Fed is not in a rush to raise interest rates,” Wan said. “Remember that last year there were also many Fed officials sending hawkish comments, but Janet Yellen would stand out sending dovish comments. They were just trying to balance the market sentiment.”

Wan expects only two rate rises this year, the first one coming no sooner than June.