Dollar rallies after Yellen hints at rate rise

16/07/2014 08:55 AST

NEW YORK: The dollar rallied against other major currencies Tuesday after Federal Reserve Chair Janet Yellen told Congress the Fed would hold its near-zero interest rate policy until the US economy strengthens.

Yellen, returning to Congress for two days of semiannual testimony on the economy and monetary policy, suggested the Fed could raise its key interest rate sooner than expected if the job market continues to make solid improvement.

"Although the economy continues to improve, the recovery is not yet complete," Yellen told the Senate Banking Committee.

The unemployment rate has fallen nearly 1.5 percentage points over the past year, and stood at 6.1 percent in June, while job growth over the first half of the year was a "somewhat stronger pace" than in 2013, she said.

Yellen voiced concern that the labor market is still showing "significant slack" with a low participation rate, slow wage growth and a jobless rate still below the Fed's estimate of a longer-run normal rate of 5.2-5.5 percent.

Inflation, though it has moved up in recent months, remains below the Fed's longer-run 2.0 percent target, she said.

The central bank's dual mandate is maximum employment and price stability. The Federal Open Market Committee (FOMC) has kept the federal funds rate target pegged between zero and 0.25 percent since December 2008 to support the economy's recovery by tamping down longer-term interest rates.

"If the labor market continues to improve more quickly than anticipated by the committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned," Yellen told lawmakers.

But, she said, the direction of interest rates "likely would be more accommodative than currently anticipated" if economic performance is disappointing.

"Yellen provided absolutely no guidance on when rates would rise and despite the rally in the greenback, the general tone of the FOMC statement was dovish," said Kathy Lien of BK Asset Management.

"The bottom line is that even with the improvements in the labor market, the Fed is not convinced that the economy is performing better."

Meanwhile, the euro was under pressure after weaker-than-expected data from powerhouse Germany.

Investment sentiment in Germany fell to the lowest level since December 2012 in July amid signs of a dent in activity in Europe's top economy, the ZEW survey showed.

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