The dollar index rose above a two-week high on Tuesday, while Treasury yields slipped after Federal Reserve Chairman Colin Powell told Congress that inflation will not get out of control.
U.S. Treasury Secretary Janet Yellen and Federal Reserve Chairman Colin Powell said more must be done to limit the damage caused by the Novel Coronavirus pandemic and promote a full U.S. economic recovery.
In prepared testimony for the House Financial Services Committee on Tuesday, the two men were upbeat about the outlook for the US economy, but they also warned that it needed help.
The hearing marked the first time the two economic leaders have appeared together in their current jobs, and it was Ms Yellen’s first appearance before Congress since taking over as Treasury secretary. Yellen thanked the U.S. Congress for passing President Joe Biden’s $1.9 trillion economic rescue plan, which was passed with only Democratic support.
On Tuesday, Ms. Yellen promised that the Treasury Department would quickly come up with a new rescue plan.
A year ago, the U.S. economy was in a deep recession, and while it began to turn around in the summer, nearly 10 million jobs that were lost have yet to be recovered.
In his testimony, Mr Powell said the recovery was far from complete, so the Fed would “continue to spare no effort to provide the economy with the support it needs”. He said the Fed “will not ignore the millions of Americans who are still hurting, including low-wage service sector workers, African-Americans, Hispanics and other minority groups that have been particularly hard hit”.
Mr Powell told Congress on Tuesday that he expected inflation to rise this year, but that it would be “not particularly large or sustained”.
In terms of COVID-19, the third wave of outbreaks in Europe has added to the market’s caution. Germany announced on Monday that it was extending the lockdown until April 18 and asking people to stay at home over Easter.
Nearly a third of France was put on lockdown for a month on Saturday after a surge in confirmed coronavirus cases in Paris and parts of northern France.
Meanwhile, in an effort to stem the flow of people, Britain announced a fine of 5,000 pounds ($6,900) for those who travel abroad before the end of June.
The dollar index.DXY was last up 0.60 percent at 92.35, buoyed by risk aversion, after hitting as high as 92.40 and as low as 91.76.
On Monday, the dollar index fell as investors sought safety, but hovered below a four-month high.
US Treasury yields also fell again, to 1.615 per cent. Earlier on Tuesday, U.S. Treasurys drew strong demand for two-year notes as investors anticipated an auction of longer-dated notes later this week.
“It’s more about fundamentals,” said Juan Perez, a currency trader and strategist at Tempus. “[We] have a lot of data to digest starting tomorrow.”
Tuesday’s rise in the dollar shows that “at the end of the day we’re not out of this situation,” Perez said of the new pandemic.
The dollar index has gained about 2.4 percent so far in 2021, as investors bet that the relatively quick rollout of COVID-19 vaccines and stimulus spending in the United States will help boost economic growth.
But global markets struck a cautious tone, with most US stock markets plunging on Tuesday.
The Dow Jones Industrial Average fell 307.98 points, or 0.94 percent, to 32,423.22. The S&P 500 fell 29.04 points, or 0.74 percent, to 3,911.55, dragged down by industrial and materials stocks. The Nasdaq closed down 149.84 points, or 1.12%, at 13,227.70. The small-cap Russell 2000 index fell 3.6 percent to 2,185.69, its biggest one-day decline since last June.
“Despite huge improvements, the third wave has left a large portion of the population medically and economically vulnerable,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. “This kind of damage takes time to heal. Vaccines will control this transmission, but it will take time.”
Crude oil markets fell particularly sharply, falling more than 6 per cent on the back of new coronavirus control measures, a slow rollout of vaccines in Europe and a stronger dollar.
U.S. WTI crude for May delivery ended down $3.80, or 6.17 percent, at $57.76 a barrel. Brent crude for May delivery ended down $3.83, or 5.92 percent, at $60.79 a barrel.
OPEC + will meet on April 1 to decide on production policy for May. “Market volatility will give Opec + some pause ahead of the meeting,” analysts at ING said in a research note.
“Prior to the recent drop in oil prices, the market was expecting OPEC + to start easing production cuts,” the agency noted. However, given current market conditions, OPEC + may hesitate, especially if market sentiment does not improve ahead of the meeting.”