Weekly Market Outlook

Dollar Drops as Traders Seek Clarity From Yellen Amid Rhetoric

A gauge of the dollar declined for a second day, paring a weekly gain, after Federal Reserve Bank of Dallas President Robert Kaplan said U.S. interest rates should only be increased gradually because of the currency’s impact on the rest of the world.

The greenback weakened against all of its developed-market peers as investors awaited Fed Chair Janet Yellen’s address to the annual Jackson Hole symposium Friday for clues on the path of U.S. interest rates. Futures indicated the probability of a December hike at 57 percent.

“More likely the commentary will, cautiously and implicitly, point towards December, with the usual conditions regarding data and risk events,” said Imre Speizer, a market strategist at Westpac Banking Corp. in Auckland. “That shouldn’t ruffle market pricing for the Fed Funds rate too much, and the dollar may well continue to consolidate around its two-month low.”

The Bloomberg Dollar Spot Index slipped 0.1 percent at 6:41 a.m. in London, adding to a 0.1 percent decline on Thursday. It has trimmed this week’s gain to 0.2 percent.

Kaplan repeated that the U.S. central bank should raise interest rates “patiently, and gradually, and cautiously.”

‘Destabilizing Effects’

“Part of what I’m thinking is the impact on the dollar, potentially destabilizing effects on the rest of the world,” he said Thursday in an interview with Kathleen Hays on Bloomberg Television in Jackson Hole, Wyoming.

Kansas City Fed President Esther George repeated her case that higher rates were warranted with the U.S. nearing full employment and inflation rising toward the central bank’s target. Top central bank officials have signaled that a rate hike could be on the table in coming months. These include New York Fed chief William Dudley and John Williams of the San Francisco Fed.

“Our economics team expects the Chair to nudge markets towards pricing greater odds of a September rate hike,” BNP Paribas SA strategists, led by Steven Saywell, London-based global head of foreign-exchange strategy, wrote in a note Friday. “An adjustment in rates markets to reflect a near-term hike should coincide with a limited but significant adjustment higher in the dollar.”