FOREX-Dollar widens gains after Yellen surprise on rates

Thu Mar 20, 2014 11:42am EDT

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* Yellen signals rate rise possible in first-half 2015

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* China's yuan deepens slide, hits one-year low (Adds quotes, updates prices, changes byline, dateline, previous LONDON)

By Michael Connor

NEW YORK, March 20 (Reuters) - The dollar powered higher against other major currencies on Thursday after Federal Reserve Chair Janet Yellen surprised world markets by signalling that increases in U.S. interest rates were not as far away as most had thought.

Yellen said the U.S. central bank would probably end its massive bond-buying program in the autumn and could start to raise benchmark rates around six months later, sooner than the consensus of market expectations.

That appeared to leave the Fed markedly less accommodative than central banks in Europe, Japan and elsewhere, according to Camilla Sutton, chief foreign exchange strategist at Scotiabank in Toronto.

"It is hard to ignore that Chair Yellen did not sound like the dove we expected and, in fact, sounded relatively optimistic about the timing of interest rate hikes. This is (US dollar) positive and supports our bearish euro and yen call," Sutton said.

The dollar, whose strength this year was one of the big bets of many banks in January, has struggled so far in 2014, weighed down by a rough winter that has at least temporarily cooled jobs growth and other indications of a broadening economic recovery.

It gained more than a cent against the euro initially after Yellen's comments on Wednesday, and after a sticky start, drove another half a percent higher in morning trade in Europe.

"From this point forward, at least for the time being, you will see a firmer tone to the dollar," said Stephen Gallo, a strategist with Canadian bank BMO in London.

"Whether this kicks on will depend on the data showing the U.S. economy emerging nicely from the weather-related dip, but until we get the next batch of data at the start of next month, Yellen has set the tone."

The dollar index, measuring its strength against a basket of other major currencies, rose to a three-week high of 80.354. It was last up 0.3 percent at 80.257. The dollar strengthened past resistance around $1.3810 per euro to trade 0.4 percent stronger at $1.3775.

The yen was off 0.13 percent to 102.48 to the dollar earlier but was up nearly 0.1 pct to 102.41 yen in New York in late-morning trade.

"The market is trying to figure out whether Yellen misspoke or really meant it," said Axel Merk, president at Merk Investments in Palo Alto, California.

TURNING POINT?

Many analysts have been burned by the dollar's failure to rise in the first quarter of 2014, hit by a combination of the poorer U.S. economic numbers, the reticence of the European Central Bank to ease its own policy further and a flood of money returning to the euro zone's battered southern bond markets.

Some were unwilling to buy the idea that Yellen's comments marked a watershed in that debate.

"There's a lot of people who believe that the dollar should be solidly higher," said Simon Derrick, a strategist with Bank of New York Mellon, speaking earlier in the day.

"But the hard facts are that something different has been going on and chiefly that has been a version of the carry trade, among other things taking advantage of higher yields in the euro zone periphery. We still face a 12-month period where we will have cheap money being pumped out of the U.S."

The Canadian dollar slid to a 4-1/2-year low of C$1.1273 against its U.S. counterpart and was last at C$1.1254, while the Australian dollar fell back below 91 U.S. cents and was last at $0.9034 in New York.

The Swiss franc also lost ground against the dollar, unmoved by a Swiss National Bank statement and news conference which tweaked its message on inflation but offered no sign of a shift in policy.

Gallo said there was certainly more room for the dollar to gain against its Canadian counterpart and others. It was roughly a third of a percent higher against the Canadian, Australian and New Zealand dollars.

"I would look for the dollar to remain strong against the weaker currencies. We may have more difficulty against the euro and sterling."

China's yuan also remained a focus, plunging to a one-year low after the People's Bank of China set a lower guidance for the currency, the second consecutive daily fall of more than 1 percent from the central bank's midpoint.

The yuan has continued to weaken since the bank announced over the weekend it would double the currency's permitted trading range to 2 percent, underlining growing concerns over China's economy and financial sector. (Editing by James Dalgleish)

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