Dollar rallies as Yellen leaves door open for 2015 rate hike

[September 25, 2015]  By Jemima Kelly

LONDON (Reuters) - The dollar rallied on Friday after U.S. Federal Reserve Chair Janet Yellen left the door open to an increase in interest rates later this year, putting the greenback on track for its best week in over two months.

The dollar had fallen to a three-week low against a basket of major currencies after the Fed failed to raise rates at its September meeting and cut its U.S. growth forecasts a week earlier. Some investors pushed their expectations for a first increase in almost a decade into 2016.

But in a speech late on Thursday, Yellen said she expected the Fed to begin raising rates later in 2015, as long as inflation remained stable and the U.S. economy was strong enough to boost employment.

The dollar index hit a five-week high of 96.664 on Friday after sliding to95.458 the previous day. That took its gains for the week to 1.6 percent - its best performance since mid-July.

The euro, having earlier fallen over 1 percent to as low as $1.1116, recovered to $1.1166 as traders arrived at their desks in New York, though it was still down 0.6 percent on the day.

The euro has had a negative correlation with risk appetite for most of the year, but that relationship has changed with the VW scandal this week, said Simon Derrick, BNY Mellon's head of currency strategy in London. Calmer European markets on Friday allowed the euro to recover a touch from its earlier lows, he said.

"I would have thought that ... the euro move higher this morning ... is about a recovery in sentiment in Europe because there's nothing fresh breaking on the car story."

Markets had been in a downbeat mood before Yellen spoke, with Wall Street closing in the red and safe-haven U.S. Treasury yields falling. But after her remarks, the 10-year Treasury yield nudged up and stocks rose.

Against the safe-haven Japanese yen, the dollar hit a two-week high of 121.12 yen, before edging down to 120.79, still up 0.6 percent on the day.

"If conditions don't worsen between now and the September employment report next week, (there could be) possibly a little bit of incremental dollar appreciation ... but I'm not convinced it will be too aggressive," said BMO Capital Markets currency strategist Stephen Gallo in London.

(Additional reporting by Ian Chua in Sydney and Shinichi Saoshiro in Tokyo; Editing by Larry King)

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