CURRENCIES: Dollar Flat After Yellen's Capitol Hill Testimony

By Anora Mahmudova, MarketWatch Features Dow Jones Newswires

New Zealand, Australian dollar jumps after strong China import data

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The U.S. dollar was little changed in Thursday trade, gaining ground against the euro and the yen, but weakening versus the British pound, as Federal Reserve Chairwoman Janet Yellen delivered a second day of testimony on the state of the economy on Capitol Hill.

The ICE Dollar Index, which measures the greenback against six major rivals, was unchanged at 95.76 late Thursday in New York. The dollar has been steadily declining since the start of the year, despite the Fed's rate-hiking initiative, which should help to strengthen the U.S. currency, but instead has seen it fall more than 6% year to date.

On Thursday euro changed hands at $1.1402, compared with $1.1413 late Wednesday in New York. However, the shared currency is up more than 8% against the dollar so far in 2017.

The euro's strength this year is primarily due to investors anticipating the European Central Bank to move away from easy-money policy.

According to Wall Street Journal, ECB President Mario Draghi is scheduled to give a speech (https://www.wsj.com/articles/draghi-may-address-future-of-ecb-stimulus-at-jackson-hole-1499944342)at the Federal Reserve's Jackson Hole conference in August, that is expected to express the central bank's confidence in the eurozone economy and reduce its dependence on monetary accommodation. Those reports come as central banks broadly have voiced optimism in the state of the global economy, which has helped to bolster their respective currencies, while putting some pressure on assets, including stocks and bonds, that have been supported by longstanding central-bank asset-purchase programs.

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The dollar has weakened as other currencies have gained traction but lingering concerns that sluggish inflation might slow the Fed's efforts to lift interest rates has weighed on greenback. And some analysts argue that the pressure on the buck may persist.

"The dollar is in a consolidation mode, but we expect it to continue to fall in the near term, mostly driven by negative real rates. When inflation is above Fed-funds rates, investors are not willing to hold dollar-denominated assets, pushing the currency lower," said Neil Mellor, chief currency strategist at BNY Mellon.

Real rates refer to the difference between Fed-funds rates and inflation. The Fed raised Fed-funds rates by a quarter of a percentage point to range between 1%-1.25% at its June meeting. Meanwhile, the personal-consumption expenditure index, or PCE, the Federal Reserve's preferred inflation gauge, fell in May, with the 12-month rate of inflation tapering off to 1.4%, well below the central bank's 2% target.

Fed-funds futures are pricing in less than 50% chance for a rate hike by December.

The dollar strengthened against the Japanese yen , trading at Yen113.22, up from Yen113.15 late Wednesday in New York.

Read:Why relying on yen weakness for carry trade is risky (http://www.marketwatch.com/story/why-relying-on-yen-weakness-for-carry-trade-is-risky-2017-07-10)

The Canadian dollar climbed slightly on Thursday, after a big jump a day before when the Bank of Canada raised its overnight interest rates to 0.75% (http://www.marketwatch.com/story/bank-of-canada-makes-first-rate-hike-in-7-years-2017-07-12), lifting rates for the first time in nearly seven years.

On Thursday, dollar bought C$1.2730, down from C$1.2747 on Thursday.

The loonie has rallied over the past two months as BOC officials pivoted from dovish to a hawkish stance. The rally was amplified by a large net short positioning that had built up, market participants said.

"It was and still is a case of a short squeeze. The loonie at this point is not supported by fundamentals and is overvalued. Our momentum indicators are showing that the currency is overbought and there will be some form of consolidation at some point," said Mellor.

In other currency pairs, the Australian dollar and the New Zealand dollar jumped against the greenback after strong Chinese import data. China reported a 17.2% year-over-year increase in imports, which came in above consensus estimates.

The Aussie dollar was up 0.7% at $0.7733, up from $0.7679 late Wednesday in New York. The New Zealand dollar bought $0.7324, up 0.9% from $0.7261 late Wednesday.

The British pound was also stronger against the dollar, buying $1.2939, compared with $1.2880 late Wednesday. Some analysts said sterling gains seem to be mostly a function of the cross-rate adjustment.

(END) Dow Jones Newswires

July 13, 2017 15:09 ET (19:09 GMT)