Dollar gains to 3-month high  as Yellen signals rate rise likely

The dollar rose to a three-month high after Federal Reserve Chair Janet Yellen said the U.S. is on track to raise interest rates this year, while emphasizing that the pace of increases will be gradual.

The U.S. currency gained against all of its major peers after the release of Yellen’s remarks that she delivered to Congress Wednesday.

The greenback surged to a six-year high against the Canadian dollar after the Bank of Canada cut its benchmark interest rate for a second time this year.

“Yellen’s testimony is the headline event for the week,” said Omer Esiner, chief market analyst at the currency brokerage Commonwealth Foreign Exchange Inc. in Washington. “We’re still pretty positive on the dollar.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 of its major peers, added 0.5 percent to 1,200.08 as of 11:12 a.m. in New York, the highest on a closing basis since April 13. The Canadian loonie fell as much as 1.6 percent to C$1.2929 per U.S. dollar.

Yellen said Fed forecasts for higher rates this year are projections and “not statements of intent to raise rates at any particular time.”

She reiterated that the timing of the first rate rise in almost a decade is less important than the subsequent path of increases, which she said would remain gradual.

Diminishing Headwinds

The probability of a Fed boost at its September meeting rose to 33 percent from 31 percent on Tuesday, according to futures data compiled by Bloomberg. For December, the likelihood was unchanged at 66 percent.

The central bank has kept its benchmark, the target for overnight loans between banks, in a range of zero to 0.25 percent since December 2008 to support the economy. It last raised the rate in 2006.

“Some of the headwinds restraining economic growth, including the effects of dollar appreciation on net exports and the effect of lower oil prices on capital spending, should diminish over time,” Yellen said in her remarks. As a result, the Fed “expects U.S. GDP growth to strengthen over the remainder of this year and the unemployment rate to decline gradually.”

Kansas City Fed President Esther George said Tuesday it’s time for the central bank to raise rates.

There’s a “slightly more hawkish tone that we’ve heard from Fed speakers as of late,” said Todd Elmer, a Singapore-based strategist at Citigroup Inc., the world’s biggest currency trader. “We are starting to see some drift forward in terms of the expected timing of the first interest rate hike, and this is translating to dollar appreciation.”

New Zealand’s dollar declined to a five-year low against its U.S. counterpart after data showed milk prices slumped almost 11 percent in a global auction. The kiwi dropped as much as 1.5 percent to 66.13 U.S. cents.

The U.S. dollar has risen 3.3 percent against its developed-market peers in the past month, making it the best performer after the pound, according to Bloomberg Correlation-Weighted Currency Indexes.