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Dollar Higher on Powell Comments, Sterling Weakness

1/11/2019, 4:43:54 PMTrading Strategies
Dollar Higher on Powell Comments, Sterling Weakness

The U.S. dollar was higher against its rivals Thursday as Federal Reserve Chairman Jerome Powell delivered a mixed message on monetary policy, stressing the central bank will be "patient," but renewed worries that its balance sheet trimming was on autopilot.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.34% to 95.11.

Powell said the Fed's balance sheet will be "substantially smaller," indicating the central bank will press ahead with its balance sheet wind-down operation, which peaked at roughly $4.5 trillion in Jan. 2015, but has now narrowed to about $4 trillion.

On rates, however, the Fed chairman said the central bank will be "patient," as it weighs the pace of global growth and domestic inflation.

The somewhat mixed message on monetary policy comes just a day after the release of the central bank's December meeting minutes, in which policymakers said waning inflation, worsening financial conditions and slowing global growth made the outlook on rate hikes less certain.

Weakness in both the pound and euro also helped the dollar hold gains.

GBP/USD fell 0.30% to $1.2750 ahead of key vote on British Prime Minister Theresa May's Brexit deal slated for Jan. 15. But analysts said there was room for the pound to advance as consensus builds for a second referendum on Britain’s European Union membership.

BNP Paribas (PA:BNPP) said its base case was for Article 50 deadline to be extended beyond March 29, with a second EU referendum "the likely outcome, or even a pre-condition for an extension."

EUR/USD fell 0.36% to $1.1501.

USD/CAD rose 0.18% to C$1.3183, but rising oil prices, a boon for the loonie, limited gains in the pair.

USD/JPY rose 0.23% to Y108.42 as subdued safe-haven demand stifled the yen.

RBC, citing a positive correlation between USD/JPY and U.S. yields, expects the yen to lose further ground against the greenback as the recent rally on Wall Street will continue to push U.S. government bond yields higher.