FX COLUMN-Communications chain points to a higher dollar

Mon Mar 24, 2014 10:03am EDT

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-- Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own --

By Neal Kimberley

LONDON, March 24 (Reuters) - The dollar should be the ultimate beneficiary of U.S. Federal Reserve chief Janet Yellen's disclosure on Wednesday that the Fed may only wait six months to raise rates once its bond buying programme is over.

Taken in tandem with policy stances in the euro zone and Japan, the euro and the yen might be the big losers.

Traders, accustomed to hanging on central bank leaders' every syllable, should take Yellen's comments at face value.

It is a tried and tested adage that you never bet against the Fed, so if traders think Yellen's comments are framing a debate that will naturally lend itself to dollar strength, buying the greenback would be logical.

Following Yellen's comment, more traders now see an interest rate hike at the Fed's April 2015 meeting.

The April 2015 Fed funds contract suggests traders see a 51 percent chance the Fed will raise rates then, compared with 34 percent a month ago.

European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda must be quietly pleased at Yellen's remark, as both would surely be comfortable with a rise in the dollar against their own currencies.

Draghi has already acknowledged that a strong euro is only adding to the disinflationary impulse in the euro zone that the ECB is trying to counter.

"How much has (the euro level) counted for the low inflation that we see today? We come up with the number - with a figure, which is roughly 0.4," Draghi said on March 6

"That is a significant statement on how the exchange rate might influence our price stability objective."

And if the message hadn't got through, Draghi said on March 16 that the euro exchange rate was "becoming increasingly relevant in our assessment of price stability".

In Japan, policymakers stand ready to unleash further monetary and fiscal stimulus as needed to support the economy, Deputy Chief Cabinet Secretary Katsunobu Kato told Reuters in an interview on Thursday.

Kuroda himself, who said on March 19 that the combination of loose monetary policy in Japan and the Fed bond buying programme are good for the world economy and Japan, must be even happier now at the prospect of a earlier-than-expected U.S. rate rise.

Any anticipatory uptick in U.S. yields would make U.S. paper more attractive to Japanese investors seeking better returns, thereby supporting the value of the dollar as those investors sell their home currency for greenbacks to fund bond buys.

Yellen's comment may therefore effectively help support a weaker yen which itself has already slid in value as a side effect of the BOJ's own ultra-accommodative monetary policy.

With central banks having sought to elevate communications policy to a fine art, a combination of recent comments from Draghi, Kuroda and Yellen arguably leads to only one logical conclusion - a higher value for the dollar. (Editing by Nigel Stephenson and Catherine Evans)

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