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Dollar Supported by Higher Rates, but Gains Limited by Political Issues

James Hyerczyk

The U.S. Dollar finished higher against a basket of currencies last week but most of the gains were attributed to a weaker Euro which accounts for a little more than 50% of the dollar index. The greenback rose against the Japanese Yen and the Australian Dollar, but lost ground to the New Zealand Dollar and the British Pound.

Weekly December U.S. Dollar Index

For the week, the December U.S. Dollar Index settled at 92.841, up 0.134 or +0.14%.

The dollar started the week under pressure due to a strong Euro and cautiousness ahead of Congressional testimonies of Fed Chair nominee Jerome Powell and current Fed Chair Janet Yellen.

The dollar index flipped to the upside on Monday after the Euro weakened and continued the rally on Tuesday during Powell’s testimony.

During his Senate confirmation hearing Tuesday, Powell did not commit definitively to a December rate hike, but strongly hinted that the likelihood is growing. In doing so, he also indicated that markets can expect more of the same from Fed leadership, even though there will be a new person in the chair position.

“The case for raising interest rates at our next meeting is coming together,” Powell told the Senate Banking Committee. “I think the conditions are supportive of doing that.”

On Wednesday Fed Chair Yellen gave the dollar a boost when she said the central bank is concerned with letting growth get out of hand so is committed to continuing to raise rates in a gradual manner. Yellen did not specifically commit to a December rate hike, but indicated that her views have not changed with her desire for the central bank to continue normalizing policy.

Also on Wednesday, the Senate moved to start debate on the Republican tax bill. This also was a positive development for the U.S. Dollar. However, the greenback retreated on Thursday after the tax reform vote ran into a snag. This news combined with reports Michael Flynn may implicate President Donald Trump in the Mueller Russian investigation drove the dollar index lower on Friday, but the index was still able to hold on to its weekly gains.

Weekly AUD/USD

The Australian Dollar posted a two-sided trade last week before closing lower. The AUD/USD settled at .7607, -0.0005 or -0.07%. The Aussie was pressured by the divergence between the hawkish U.S. Federal Reserve and the dovish Reserve Bank of Australia. It was supported by the Flynn news.

Weekly NZD/USD

The New Zealand Dollar was helped by technically oversold conditions and an upbeat RBNZ Financial Stability Report and friendly remarks from RBNZ Governor Spencer. The NZD/USD settled at .6882, up 0.0016 or +0.23%.

In its financial stability report, New Zealand’s central bank said it would unwind some restrictions on home loans to partly offset the impact of planned government curbs on the country’s housing market, which has cooled in recent months.

This article was originally posted on FX Empire