Greenback sees biggest drop in six years after Fed chief says currency weighing on exports

Janet Yellen just instilled some doubt in dollar bulls.

The Federal Reserve chair acknowledged the negative consequences of this year's gains on Wednesday, saying the currency is weighing on US exports and inflation as policymakers pared back their outlook for interest-rate increases.

That sent the greenback down by the most in six years and prompted some analysts to suggest the rally will pause following a 14 percent gain in the past six months.

"They clearly do care about the dollar, and the Fed's important for the dollar trend," Jens Nordvig, managing director of currency research at Nomura Holdings Inc in New York, said by phone. "We're going to have a couple of months of consolidation."

The dollar's ascent has been fueled by the Fed's plans to raise borrowing costs this year at a time when central banks are easing from the euro area to Canada and Australia. Sweden's Riksbank became one of the latest to drive down its currency this week, lowering its key interest rate outside of its schedule for policy decisions.

The Fed's indication it will raise rates more slowly than it previously predicted sent the Bloomberg Dollar Spot Index down 1.8 percent on Wednesday to 1,194.89, the biggest drop since March 2009. The index, which is weighted against other currencies including the euro and yen, gained 0.5 percent on Thursday to 1,200.45 as of 1:22 pm Beijing time.

Dollar strength

The Fed "can't ignore the stronger dollar's implications for growth", said Alan Ruskin, the global head of group of 10 foreign exchange at Deutsche Bank AG in New York.

Policymakers cut their estimate for the federal funds rate at year-end to 0.625 percent, down from a forecast of 1.125 percent in December. The outlook for 2016 fell to 1.875 percent from 2.5 percent.

The greenback has something to do with the cuts to those projections. Yellen, who also lowered her assessment of the economy, said the strong dollar has weighed on consumer prices and contributed to weak export growth and low import prices.

Currency clashes

"It puts the US dollar increasingly on the radar - now we know the Fed has its eye on it, and the impact on exports and growth," Matt Derr, a foreign-exchange strategist at Credit Suisse Group AG in New York, said by e-mail.

"We are just seeing some consolidation after a very strong US dollar move in recent months."

While Yellen has downplayed the notion of a global currency war, the Fed has stood out for its plans to raise rates as other nations devalue their currencies to spur economic growth and fight deflation.