Do Markets Like Yellen for Her Dovish Bias? US Dollar Says No.

Talking Points

Franc, Yen Fall as Aussie Dollar Gains as Yellen Fed Nod Boosts Risk Appetite
US Dollar Gains After Yellen News, Hinting Markets See More Than Just a Dove
September’s FOMC Minutes in Focus to Guide QE “Taper” Timing Outlook

The safety-linked Swiss Franc and Japanese Yen underperformed while the sentiment-anchored Australian Dollar advanced against all of its top counterparts overnight. The newswires chalked up the swell in risk appetite to reports suggesting US President Obama would nominate Fed Vice Chair Janet Yellen to take over from Ben Bernanke at the helm of the central bank when the current Chairman’s tenure ends in January. The markets have long favored Yellen’s candidacy, believing her forceful defense of the Fed’s unconventional policies will translate into a longer-lasting stimulus effort. That doesn’t seem to tell the whole story however.

If the markets’ rosy disposition was a pure reflection of Yellen’s accommodative bias, the US Dollar might have been expected to decline. On the contrary, the greenback rose by as much as 0.24 percent against the majors. With that in mind, overnight price action could have been a reflection of broader contentment with the selection of responsible rather than simply dovish stewardship. Indeed, despite her recent advocacy of stimulus, Yellen has a formidable inflation-fighting record over her history at the central bank. The Wall Street Journal also reports that based on its analysis, she’s produced the most accurate economic forecasts of all the current Fed officials from 2009 to 2013.

Looking ahead, the spotlight turns to the release of minutes from September’s FOMC policy meeting. Traders had widely expected the first move to “taper” QE asset purchases at that sit-down only to be disappointed, prompting sharp volatility across financial markets. While the US government shutdown has potentially changed the calculus behind the FOMC’s decision-making process after September’s outing, the report may help illuminate some of the moving parts investors ought to watch to handicap the Fed’s trajectory.A sense of immediacy in policymakers’ support for a reduction of QE is likely to boost the Dollar while a cautious tone stands to produce the opposite effect.

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