Dollar rally ignited as ECB signals possibility of June stimulus - report
KUWAIT (May 11) Initially, the US dollar traded lower against most of the major currencies despite stronger Non-Farm Payroll readings the previous week amid Fed Chair Yellen's testimony, an economic report showed.
Yellen reiterated that "a high degree of monetary accommodation remains warranted." Nonetheless, she remained optimistic on the economy mentioning, "With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already underway," said the report released by the National Bank of Kuwait (NBK).
Meanwhile, she noted that there is "no mechanical formula or timetable" for when an interest rate hike will happen but maintained that rates will stay near zero for a "considering time" after ending QE. The dollar index dropped to as low as 79.06 at the beginning of the week. However, the greenback rallied on Friday to reach a one-week high after the European Central Bank signaled it could deliver fresh monetary stimulus as early as next month.
Last week the Euro traded at a 2-1/2 year high against the US dollar as service activity grew in all of France, Germany, Italy, Ireland and Spain for the first time since May 2011. However, the currency lost most of its gains as Mario Draghi warned after the bank's policy meeting that the Euro's strength was "a serious concern" and that the ECB was "comfortable" with taking more action to support growth and raise inflation at its June Meeting.
Similar to the Euro, Sterling nearly reached 1.70 a level it did not reach since August 2009 as figures from the Services and Manufacturing sectors exceeded expectations. Meanwhile, cable lost its momentum and dropped to 1.6830 as the Bank of England refrained to increase rates, it said.
Growth in the US services sector accelerated in April, rising at the fastest pace in eight months as new orders jumped and overall activity quickened by the most since early 2008. The Institute for Supply Management said its services sector index rose to 55.2 in April from 53.1 in March, topping expectations for a read of 54.1. The data provides further evidence that economic activity is regaining momentum after lagging through much of the winter, a stillness largely blamed on harsh weather, it added.
The Federal Reserve must continue to spur economic growth as indicators for inflation and employment remain far from the central bank's goals, Chair Janet Yellen said. She highlighted weaknesses in the labor market, such as the number of long-term unemployed, even as the economic outlook improves. The Treasury market yield curve steepened after her comments tempered expectations among some investors for a faster pace of interest-rate increases.
"A high degree of monetary accommodation remains warranted," Yellen said in a testimony prepared for delivery to the Joint Economic Committee of Congress. "Many Americans who want a job are still unemployed," and inflation is below the central bank's 2 percent target, she said. Data show "solid growth" in the second quarter, bolstering the case for a faster expansion this year, Yellen said.
In the UK, the Bank of England left interest rates and asset purchases unchanged, despite building pressure for it to act to ease the housing market.
The central bank announced it would keep the base rate at a record low of 0.5 percent and maintain the size of its asset purchase program at آ£375 billion as expected by investors, the report concluded.
