Yellen confirms Fed rate hike expectations further boosting dollar

Several Federal Reserve officials have recently stressed the need for and likelihood of a Fed interest rate hike in December. But perhaps the strongest affirmative indication came on Thursday, when Fed Chair Janet Yellen said in testimony before the Joint Economic Committee of Congress that such a hike would be "appropriate relatively soon."

Yellen honed in on the dangers of delaying a rate hike, as such a delay could result in the FOMC having to “tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals" (inflation and employment). She also stated that "holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability."

As usual, however, Yellen tempered these remarks by reiterating that the pace of future tightening will be “gradual.” The next Fed decision will be announced on December 14, and the futures markets have been pricing-in increasingly higher probabilities of a 25-basis-point hike. Currently, the implied probability of such a hike remains exceptionally high at above 90%.

The US dollar has already been rallying unrelentingly since Donald Trump became the US President-elect last week, as expectations of higher spending and inflation under a Trump Administration fueled upward pressure on interest rates. Yellen’s testimony on Thursday helped to fan these flames even further.

The question now remains as to whether these higher interest rate expectations have already largely been priced-in to the rallying US dollar, or whether the greenback has significantly further to run. At this juncture, it appears that the dollar’s run is not quite over, at least until the December Fed decision is over and done with. Rising anticipation of a Fed rate hike coupled with expectations of higher bond yields as Trump prepares to take office could drive the dollar even higher in the near-term, towards year-end.

Further down the road, however, much could change with respect to Trump’s highly-touted spending plan, and with it, inflation expectations. Additionally, the Fed’s long-held stance on “lower-for-longer” interest rates after a potential December hike, could put a cap on further dollar strength.