Derek Halpenny, European Head of GMR at MUFG, notes that the Fed Chair Yellen managing to escalate her dovish stance even further with comments yesterday that would make you wonder what it is that Chair Yellen knows that we all don’t! Key Quotes “Crucially her comment in the FOMC press conference that April remained “live” was not repeated yesterday and Yellen appeared to become even firmer in her view of caution stating this was “especially warranted”. What is also telling, and perhaps why many thought this speech might have revealed some pull-back from the 16th March, is that Chair Yellen appears indifferent to the potential risk of being viewed as out of sync with a growing number of her FOMC colleagues. Fed Presidents Bullard, Harker, Lockhart have all stressed that April is still a “live” meeting and indeed Fed President Kaplan joined that group when he expressed the same view last night in a speech in Texas. This shows a level of determination we haven’t really seen from Chair Yellen and suggests she holds real concerns over downside risks to the economy. Having read through her speech it is clear that there is now much much more emphasis on global economic conditions. In outlining “Risks to the Outlook for Real Economic Activity” Yellen pointed to global growth, which is “importantly influenced by developments in China” with Yellen pointing to uncertainties over how smoothly China could make the transition from investment to consumption led growth. The second risk related to a renewed drop in commodity prices (especially oil) and in particular the impact that would have in emerging market economies reliant on commodity exports. No upside risks were addressed. Yellen then outlined “Risks to the Inflation Outlook” which were again related to events abroad – a slowdown in global growth, falling commodity prices and renewed US dollar appreciation. Yellen remains clearly dubious of the recent upturn in inflation and also indicated her concerns over declines in measures of inflation expectations – both market and survey measures. Yellen did cite upside risks here but it was clearly of secondary importance. Once again Yellen barely mentioned the recovery in risk appetite and the general improvement in financial market conditions that has been in play now since 11th February – that’s seven weeks ago! Yellen mentioned the oil price rise as seen in the “past few weeks”! Clearly this speech which further reinforces the dovish stance of Chair Yellen will have a notable impact on US dollar direction. The fact that the relative strength of the domestic economy now appears of secondary importance to developments abroad means the US dollar is one important element of the Fed’s deliberations and keeping the dollar weaker is something the FOMC wants. As Yellen clearly pointed out yesterday, risks in regard to future Fed policy action through the use of conventional monetary policy is clearly asymmetric and hence there is a case for being ultra-cautious in lifting rates from here. Our sense now is that there is a clear desire from Yellen to avoid renewed dollar strength. Considering the downside risks mentioned in this speech – China and oil prices – a weaker dollar can only help to alleviate those two key downside risks. The question now that market participants will be asking is – why buy the US dollar with this perception of Yellen wanting to avoid US dollar strength? The key reason for buying the dollar is that the US economy remains resilient and that would force the Fed to tighten. But if US dollar strength re-emerges the downside risks referred to by Yellen will also re-emerge and threaten the very reason for buying the dollar – Fed tightening. We are maintain our view of two rate hikes this year but our updated dollar forecasts will show a considerable removal of dollar strength due to Chair Yellen’s very cautious stance.” For more information, read our latest forex news.