Dollar falls as Powell sees little risk of inflation overheating

NEW YORK (Reuters) – The dollar fell on Friday after Federal Reserve Chair Jerome Powell said he sees little risk that inflation is poised to accelerate beyond the central bank’s target but that steady interest rate hikes are the best way to protect the U.S. economic recovery for now.

FILE PHOTO: A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

The dollar was also hit by moves by the People’s Bank of China to stabilize the yuan, which had been under broad pressure amid trade tensions between the United States and China.

Powell’s statement that rate hikes are keeping job growth strong and inflation under control was a high-profile endorsement of the central bank’s current policy approach after U.S. President Donald Trump criticized the pace of rate hikes this week.

Powell’s remarks about inflation were seen by some as a signal that the Fed has little need to push rates beyond the bank’s perceived level of the neutral rate, or where the federal funds rate reaches an equilibrium where it neither stimulates nor suppresses economic growth. Policymakers’ latest assessment of that rate was around 2.9 percent, roughly 1 percentage point above the current level of between 1.75 and 2.00 percent.

The dollar index .DXY, which measures the greenback against a basket of six other major currencies, fell a quarter of a percent from its position at 10:00 a.m. EDT when Powell’s remarks were made public. It was last at 95.145, down 0.64 percent.

In his remarks, Powell discussed the 1 percentage point decline in Fed policymakers’ assessment of the natural rate of unemployment and the neutral interest rate since the U.S. central bank began raising rates in December 2015.

“These changing assessments have big implications,” said Powell, including the idea that the Fed’s policy had been “less accommodative than thought at the beginning of normalization.”

Mazen Issa, senior FX strategist at TD Securities in New York, said Powell’s remarks built on a stance seen in the minutes of the Fed’s latest policy meeting released on Wednesday.

“The dollar’s reaction is a part of a narrative that was established earlier this week, one that we saw in the minutes, with respect to the Fed making progress toward neutral,” Issa said.

“Specifically, the reference there was that some members had become more uncomfortable with the narrative in the Fed policy statements that policy is still accommodative,” Issa said.

The dip in the dollar index following Powell’s speech extended losses that began in the Asian session after the People’s Bank of China took steps to stabilize the currency market. The onshore yuan strengthened by nearly 1 percent against the dollar, last at 6.803 yuan CNY=.

China’s central bank said on Friday that it was adjusting its methodology for fixing the yuan’s daily midpoint, amid broad dollar strength and ongoing trade tensions between Washington and Beijing.

The greenback has been buoyed by a new round of tariffs in the escalating U.S.-China trade conflict and the Fed’s latest policy meeting minutes, which signaled a September interest rate rise. The dollar has benefited from Trump’s protectionist policies and from a flight to quality as geopolitical tensions mount.

(GRAPHIC: World FX rates in 2018:

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