Hawkish Fed remarks fail to prevent dollar from closing down on week amid mixed data

The Fed rhetoric over the last week was hawkish on balance helping support the dollar but the data prints from the US were not strong enough to prevent the USD index from closing its second straight week lower, blurring the dollar outlook for the currency markets.

Federal Reserve Chair Janet Yellen said late on Friday (26 March) that the US central bank is likely to raise rates this year itself even if the country did not meet the 2% inflation target.

"With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year," Yellen said at a monetary policy conference at the Federal Reserve Bank of San Francisco, as per a Reuters report.

A few hours earlier, data showed US gross domestic product growth of 2014 fourth quarter was 2.2% on an annualised basis, less than the 2.4% first estimated, and from 5% in the third quarter. The quarterly growth rate, however, was revised to 0.2% from 0.1% but still lower than the Q3 reading of 1.4%.

Another positive data print on Friday was the Reuters/Michigan consumer sentiment index that came in at 93.0, less than February's 95.4 but much better than analysts' expectations of 92.0.

Of the three subordinates of Yellen who were speakers at various events last week, two sounded hawkish, showing that the Chair's view has been strongly supported.

St Louis Fed president James Bullard said that the US economy will be in full-blown boom by the end of the year and risks overheating unless the Fed lifts interest rates soon.

Zero interest rates no longer 'appropriate'

"Zero interest rates are no longer appropriate for the US economy. If we don't start normalising monetary policy we'll be badly behind the curve two years from now," Bullard said.

Later, Chicago Fed president Charles Evans said the US policymakers should be "quite confident" that inflation is headed back to the central bank's 2% target before raising interest rates, effectively demanding a delay in rate increase until the first half of 2016.

Evans said core inflation should be above the current level of 1.3% to be comfortable for raising rates. He added that an annual wage growth of 3-4% and a rise in inflation expectations will be necessary for the first rate increase.

Atlanta Fed president Dennis Lockhart said he would increase interest rates midyear or even later as the economy throws up "mixed signals" at the moment.

Data releases from the US were mixed with a slight hawkish bias. The consumer price index growth in February was 0.0% from a year earlier when analysts had been expecting a 0.1% drop, repeating the January outcome.

Markit PMI numbers for March were better than expected too but the durable goods orders growth for February was a big surprise on the downside.

The USD index, a gauge that measures the trade-weighted strength of the greenback against a basket of six major currencies, moved off the weekly low of 96.19 touched on Thursday (25 March), but the close at 97.39 was significantly below the previous week's close of 97.91.

The dollar index is still off 3% from the 12-year high of 100.40 touched on 13 March but the fact that the US currency has rallied more than 25% over the past eight months makes such a correction negligible.