With less than an hour to go before Janet Yellen delivers the opening statement for her confirmation hearing on Capitol Hill, the U.S. dollar is trading strong, having erased all of its overnight losses. When her prepared comments were released Wednesday afternoon, stocks soared and the dollar collapsed as it became clear that she won’t be acting out of character just to appease her critics. Yellen will stick her views that monetary policy needs to remain accommodative because unemployment is high, the output gap large and inflation expected to run below the Fed’s 2% target for some time. These unambiguously dovish comments should have kept the dollar weak ahead of her testimony before the Senate Banking Committee but the main focus of the event is the Q&A session. While we do not expect Yellen to be hawkish, under grilling by Senators she could sound more moderate and open to various options. Also tapering is inevitable and the only question is whether the Fed will reduce asset purchases in December or March. Investors can’t expect a straight answer since the decision has not been made but her assessment of the economy and inflation will help shape the market’s expectations. Yellen has long been criticized for being soft on inflation but with high unemployment, she can soundly argue that jobs come first.

As we have seen from watching Bernanke’s semi-annual testimonies, being in the hot seat on Capitol Hill is never easy and investors will be watching carefully to see if she wavers in her views, ends up sounding more moderate or admits that tapering needs to happen eventually. This is the very first time that the mild mannered central banker has testified on Capitol Hill since her low key 2010 Fed vice-chair confirmation. Aside from being a smart and experienced economist, the head of the central bank also needs to be politically savvy. Most speeches by central bank officials are scripted and today we will get a chance to see how she handles herself live in an environment where she could find herself heavily criticized for her soft views on inflation. Her views in general will carry increased importance if she becomes the new Fed Chairman, so she will need to choose her words carefully because her comments on monetary policy could have significant ramifications for U.S. assets. Senator Rand Paul has threatened to hold back the nomination but with 45 other Republicans present, her confirmation is expected to be smooth with few politicians willing to block the confirmation of the first female central bank governor.

Meanwhile this morning’s U.S. economic reports had very little impact on the dollar. Jobless claims dropped from an upwardly revised 341k down to 339k while the trade deficit rose to -$41.8B from -$38.7B in the month of September. Despite the improvements in the ISM manufacturing index, exports dropped for the third consecutive month, reflecting the potential weakness in global demand. Domestic demand on the other hand is showing signs of improvement with imports rising 1.2%.

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