Currencies: Dollar firms as Fed’s Yellen reiterates rate-hike view, Catalan uncertainty persists

The U.S. dollar held to a small gain Monday after U.S. Federal Reserve Chairwoman Janet Yellen again left open the possibility of further interest-rate increases in 2017, while markets kept tabs on developments over Catalan’s independence drive.

Where currencies are trading

The ICE U.S. Dollar Index

DXY, +0.04%

which gauges the dollar against six other currencies, was up 0.1% at 93.208, and the WSJ Dollar Index

BUXX, +0.09%

a broader measure of the greenback’s performance, tacked on 0.1% to 86.36. Last week, both indexes fell by 0.8%, the first weekly loss in five weeks.

The euro

EURUSD, -0.1354%

 bought $1.1791, down from $1.1821, taking a breather from last week’s rise of 0.76%, according to WSJ Market Data Group.

The pound

GBPUSD, +0.1505%

 traded at $1.3301, up from $1.3285 late Friday in New York.

Against the yen

USDJPY, -0.04%

the dollar was unchanged at ¥111.82 from late Friday.

The greenback was up against Switzerland’s currency

USDCHF, +0.0924%

at 0.9760 francs versus 0.9745 francs.

What’s driving the market

The “ongoing strength of the economy will warrant gradual increases” in short-term interest rates, Yellen on Sunday told a Group of 30 banking seminar in Washington. Yellen’s continued backing of rate hikes is in tune with market expectations that the Fed will bump up rates at its December meeting, and higher rates tend to increase a country’s currency real rate of return.

The largely subdued moves in the currency market may persist Monday, with the Empire State manufacturing index for October the only major economic data release. That’s due at 8:30 a.m. Eastern Time.

Minneapolis Fed President Neel Kashkari is expected to appear in a moderated discussion at a G100 dinner in Minneapolis at 9 p.m. Eastern.

Meanwhile, the euro slipped after Catalonia’s President, Carles Puigdemont, on Monday told the Spanish government he wanted two months of talks to discuss the northeastern region’s break from Spain, according to local media reports said. But he didn’t clarify whether Catalan leaders have formally declared independence after a regional referendum this month backed a split.

What analysts are saying

“Given that a December rate hike is almost entirely priced in, the dollar will be driven by longer-term expectations. The three rate hikes plotted on the Fed’s dot plot for 2018, is nowhere near to markets’ expectations of only one, and the main risk facing the greenback is who will lead the Fed after Janet Yellen departs,” said Hussein Sayed, chief market strategist at FXTM.

“If [wages and inflation] remain weak in the final quarter of the year, I think the dollar will continue to be dragged lower,” he added in a note.

Turning to the euro-dollar pair, Spain’s Deputy Prime Minister Soraya Saenz de Santamaria in a televised statement said Catalan has until Thursday at 10 a.m. local time to back away from its independence push.

“The current standoff between Madrid and Catalonia is unlikely to provide a particularly stable resolution for markets, with a strong potential for further flare-ups should [Spain’s Prime Minister Mariano] Rajoy strip the region of their autonomy,” wrote IG market analyst Joshua Mahony.

There’s “a good chance that we will see the downward pressure of the euro continue apace as the week goes on,” he said.